PLANADVISER: If your plan sponsor clients are offering a money market fund as their capital preservation option, is this a good time to suggest they replace it with a stable value fund? If so, why?
Tom Schuster: It made sense before the money market rules went into effect, and it makes even more sense now. For starters, stable value has decisively outperformed other capital preservation options. Our client data show that for the 10-year period ending December 31, 2017, for example, stable value outperformed inflation by more than one percentage point per year, while money market funds lagged by 120 basis points. So, on an absolute basis, stable value outperformed money market funds by about 230 basis points per year. This is achievable because stable value is only available in tax qualified plans, and can use the tax and plan provisions available in those plans to go out a little longer on the yield curve.
PA: Apart from returns, how do stable value funds compare to other capital preservation options?
Warren Howe: Stable value has consistently outperformed other short-term fixed income options, not only with higher returns but also with lower volatility—all while providing equivalent levels of liquidity. It has always provided the funds required for participant transactions. Stable value also has a lower correlation to the returns of other asset classes offered in DC plans, which makes it a better diversifier. Finally, stable value has a 40-year track record of preserving principal and providing a reasonable return on investment, no matter the market conditions. I think one of the most important aspects of stable value is that it performs as designed in all market conditions so it’s there for participants when they need it.
PA: Don’t many advisers already recommend stable value for those very reasons?
Schuster: Advisers do indeed recommend stable value—often. But there’s a disconnect between what they recommend and what plan sponsors are doing. MetLife’s 2017 Stable Value Study found that 73 percent of sponsors who offer stable value, and 67 percent who offer money market, said their advisers recommended those options to them. However, 90 percent of advisers report recommending stable value very often, while 86 percent say they seldom or never recommend money market funds. This indicates money market funds are seldom or never recommended, according to advisers, yet are perceived by plan sponsors to be strongly recommended by those same advisers. It is important that advisers communicate the advantages of stable value, supported by compelling data, and make sure their clients understand it.
PA: What’s the key message that needs to be delivered?
Schuster: Advisers—and all of us in the retirement industry—need to encourage greater appreciation of stable value’s risk and return profile. Fifty-six percent of the plan sponsors we surveyed were aware that stable value returns outperformed money market returns over the past 15 years, but 84 percent did not know that stable value returns exceeded inflation over that same period.
PA: Target-date funds (TDFs) are capturing the bulk of the new money going into DC plans. Is there a role for stable value there?
Howe: Absolutely. We see growing interest in using stable value as the fixed-income component in TDFs in lieu of money market or short-term bond funds, not only because stable value offers higher returns but also because it’s less volatile. Plugging in stable value should allow target-date funds to increase their allocations to equities, which have higher expected returns. This should benefit participants. It’s worth noting, by the way, that stable value can work in either a custom or off-the-shelf TDF structure.
PA: Do you see the asset class growing?
Schuster: With approximately $735 billion in assets, it’s clear stable value has earned the trust of plan participants. We believe it has a long and bright future, because it offers benefits that participants value.