In a presentation at the 2013 PLANADVISER National Conference, attendees heard data from the Stable Value Investment Association (SVIA) that one in six defined contribution (DC) plan dollars (18%) is invested in stable value products. Allocations to stable value have held constant at 15% to 20% over time.
There is usage across generations; participants understand the benefits of stable value funds. Older participants count on it as a big part of their nest egg.
Stable value vehicles have performed as expected in various market cycles—even in times of severe financial crisis. Aruna Hobbs, managing director, head of stable value at New York Life Investment Management, noted that no other investment offers both investment potential and insurance.
Michael L. Davis, senior vice president and head of stable value at Prudential Retirement, added that as the American demographic matures, the demand for predictability and safe assets will only go up.
There are three types of stable value vehicles: insurance contracts, collective investment trusts (CITs) and—for large plan sponsors—more customized managed accounts. Aldo Vultaggio, senior portfolio manager at AEPG Wealth Strategies, said the major difference is an insurance contract is backed by one insurance provider, where CITs are backed by several. Also, CITs tend to be more conservative and have a higher yield.
According to Vultaggio, advisers should present the options to plan sponsors and ask them which risk they are more concerned about: portfolio risk or insurer risk. Hobbs explained that CITs and wraps are more investment-based (good or bad) with more transparency, and guaranteed accounts give stronger insurance protection (but not at the cost of returns).
According to Davis, stable value products are much stronger today than before the recent financial crisis. Portfolios do not have as much spread and are of shorter duration, so they are better able to withstand rising interest rates and will be less volatile.
Hobbs added that banks suffered a capacity crisis and left the market. Insurance companies stepped up. As a result of the demand/supply imbalance and the realization of the value of a guarantee, prices for stable value products have gone up, but Hobbs said it is a more accurate reflection of their value. She added that it makes for a healthier, more disciplined market and highlights the major players in it for the long haul.
Vultaggio said plan sponsors need to consider the market to book value ratio when selecting stable value products. They also need to look at fund termination provisions—they would prefer shorter put options provisions in case the plan sponsor needs to liquidate, change or merge funds. He also suggested plan sponsors find out how large the fund is and what type of other investors are in the fund—plan sponsors will want diversity. In addition, if plan sponsors want to do a re-enrollment or move to a target-date fund (TDF) as their plans’ qualified default investment alternative (QDIA), they will need to find out if re-enrollment is considered a “plan initiated event” according to the stable value product’s terms.
Davis said he believes TDFs are the best QDIA, but the conservative sleeve of the TDF should include stable value investments because they perform better and more consistently than money market funds.