DC Consultants, Advisers Weigh Capital Preservation Options
As the Federal Reserve weighs further interest rate cuts after its first cut of 2025 last week, defined contribution plan consultants and advisers are changing their capital preservation tactics. In T. Rowe Price’s fifth annual Defined Contribution Consultant Study, respondents showed a marked year-over-year increase in interest in transitioning to a pooled fund from a stable value general account.
Asked how they felt about moving to a pooled fund from a stable value general account in the next 12 to 18 months, using a scale of 1 (strongly disagree) to 4 (strongly agree), surveyed DC consultants and advisers responded with an average of 2.3, up from 1.7 last year.
The switch reflects unusual interest rate conditions, whereby, T. Rowe Price noted, for only the third time in 29 years, money market fund yields—based on short-term investments and debt—are outpacing stable value crediting rates—based on bond portfolios with insurance guarantees.
“There is increased demand to take another look at the capital preservation option,” says Jessica Sclafani, a global retirement strategist for T. Rowe Price. “What’s really important is to contextualize for plan sponsors just how rare of a situation this is.”
Increased Focus on Diversification
A recent article by Michael Dullaghan, a retirement strategist at Franklin Templeton, reinforced this, noting that the monetary easing “follows a challenging stretch for 401(k) advisors, plan sponsors, and retirement investors, where money market returns consistently outpaced longer-duration capital preservation options such as stable value funds.”
Dullagan noted that with the normalization of the yield curve, “stable value funds may re-gain appeal for retirement plan fiduciaries and their participants. These funds can potentially provide the two outcomes plan participants seek for capital preservation: the price stability of a money market fund, along with inflation-beating long-term returns. As rates decline, stable value funds could represent a compelling alternative against traditional cash-like vehicles” like money market funds, for which yields closely follow the federal funds rate.
Advisers and consultants appear to understand the importance of this situation as well. Survey respondents said they had more interest in reviewing capital preservation options (2.8 out of 4) and increasing capital preservation activity due to interest rate and market environments (2.8) in the next 12 to 18 months than they showed in 2021 (2.4 and 2.3, respectively).
The study also found that 73% of responding firms said they had greater focus on diversifying their fixed-income portfolio, compared with just 48% of respondents in 2021. Asked what influenced their evaluation of fixed-income investment options, the most-cited reasons were poor performance (64%), current interest rates (61%) and interest rate expectations (61%). According to the report, these findings reflect “some frustration with the absolute performance of fixed income as an asset class in a rising rate environment.”
Notably, the statement “exploration of transitioning a stable value general account or insurance company product to a pooled fund” saw a meaningful year-over-year increase in support, as those reviewing investments want to capture higher crediting rates through transitions out of insurance company general accounts to pooled funds, according to the report.
Alternatives in Target-Date Funds
The survey also asked firms which alternative investment strategies they would likely incorporate into their DC plans over the next 12 to 24 months. Using the same scale of 1 (strongly disagree) to 4 (strongly agree), private credit received 2.1, up from 1.7 in 2021. Private equity also had a similar climb to 1.9, from 1.6 in 2021. Commodities were the most popular option, at 2.4, up from 2.2 in 2021. Direct real estate (2.3) and hedge funds (1.3) remained unchanged since 2021.
A large majority of respondents said alternative investments were likely to be incorporated into DC plans through target-date funds. For private credit and private equity, 70% chose custom TDFs and 18% chose off-the-shelf TDFs. Two-thirds (67%) of respondents chose off-the-shelf TDFs for commodities. For direct real estate, more than one-third (34%) of respondents chose off-the-shelf TDFs and 54% chose custom TDFs.
The responses came well before President Donald Trump’s August 7 executive order directing the Department of Labor and the Securities and Exchange Commission to make regulatory changes to encourage increased availability of private market assets in retirement plans.
“We’re not talking about adding private equity as a stand-alone option on the investment menu,” Sclafani says. “Plans sponsors are not, on the whole, expressing strong demand for private assets. They are all interested in education on private assets and understanding what it would actually look like to incorporate private assets into DC plans.”
When respondents were asked for reasons that would prevent implementation of alternative investments in DC plans, the most-cited reason was fees (72%), followed by liquidity (44%) and operation complexity (39%).
Sclafani says plan advisers who need further guidance on private assets should look to their provider partners, so that they can, in turn, better advise plan sponsors on whether to not to include private assets.
From January 13 to March 10, T. Rowe Price surveyed 36 consultant and adviser firms, which represent nearly $9 trillion in assets under advisement as of December 31, 2024, responsible for more than 70% of the $12.5 trillion DC plan market.
