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Rate Cuts Changing DC Investing Landscape
Experts at a PLANADVISER webinar highlighted the effects of interest rate cuts on stable value and money market funds.
With the Federal Reserve lowering the federal funds rate to a range from 4.75% through 5%, financial experts are predicting up to five more rate cuts to align with the market-driven two-year Treasury rate, which has dropped to 3.57%, Jeff Cullen, the CEO of Strategic Retirement Planners, noted during a PLANADVISER webinar held Tuesday.
The rate cut regime, Cullen noted, is just in time for stable value funds that, while historically popular in defined contribution retirement investing, have been hurt as investors turned to equally risk-averse money market funds.
“Just about every single stable value in the entire industry is underwater, and so rates coming down will be some much-needed relief for stable value funds, because they’re struggling,” he said. “Hopefully rates come down fast enough to save some of these stable value funds from blowing up. … For those of us that were doing this 22 years ago, I can tell you they can blow up, and I’ve seen it. It’s really ugly.”
Derek Fiorenza, the chief operating and chief commercial officer of Summit Group Retirement Planners Inc., noted that almost all the retirement plans his firm manages rely at least somewhat on stable value, particularly those that do not enforce “put,” which limits liquidity.
Ensuring the stability of these funds is crucial, Fiorenza said, with insurance quality and credit standing as top concerns. He explained that despite recent adjustments, most stable value funds remain well positioned, thanks to strong cash reserves.
Fiorenza also mentioned, however, that some of his clients continue to benefit from money market accounts, which have performed well in the current rate environment. Similarly, short-term investments, such as Treasury bills, have been advantageous for individual clients, and bank CDs have also provided a safe option. He provided a recent example in which a bank offered a teaser rate of 9.9% for six months, presenting unique opportunities in the short-term investment space.
Cullen of SRP noted to the online audience that the Fed typically lags market rates, with the current delay one of the longest such instances. He explained that while the fed funds rate is controlled by the Federal Reserve, the two-year Treasury rate is set by market forces, signaling that more rate cuts are already priced in by the bond market. Cullen highlighted that for investors, this means little incentive to hold long-term bonds, as the yield curve remains relatively flat.
“It doesn’t pay much to be in the aggregate bond index right now,” he stated, advising a barbell strategy in bond portfolios: focusing on short-term bonds with higher yields and a small allocation to long-term bonds as a hedge against equity volatility. He said this approach has been particularly successful since the Ukraine war began, offering protection from rate cuts while balancing risk in equity markets.
Tom Demko, a managing director at SageView Advisory Group, added that stable value funds could play a key role in asset allocation but may come with limitations, such as a lack of flexibility from recordkeepers.
More generally, Demko stressed the complexity of retirement planning decisions considering the shifting markets. He pointed out the need, in particular, for participants to carefully consider when deciding between pre-tax and Roth distributions, particularly for those nearing retirement.
“There’s no one-size-fits-all answer,” Demko said, emphasizing that each participant’s financial situation, investment strategy and the flexibility of their retirement plan should drive decisionmaking.
The full conversation can be viewed on demand.