Safe Haven: A Review of Stable Value Retirement Funds
One guiding principle among retirees and those approaching retirement is that they shift their assets into fixed income or other safer investments to protect them from market instability and loss of value. Although traditional fixed income instruments, such as bonds or money market funds, may appear to be safer bets, even these tools can be more vulnerable during economic downturns. Stable value funds, less well-known and often overlooked by plan sponsors and participants alike, are a safe solution that is worthy of consideration. They are frequently included in company retirement plans and provide principal preservation and a predictable income stream for retirees’ golden years. In this blog, we will explore how stable value funds can play an important role as an asset class for retirees and those who are still building retirement savings.
Stable Value Basics
Stable values funds are conservative investment vehicles offered by defined contribution (DC) employee benefit plans (including 401(k), profit sharing, money purchase, governmental 457 plans, and certain 403(b) plans) and provide a unique combination of benefits that offers:
- Principal preservation;
- Stability and steady growth in principal and earned interest;
- Returns similar to intermediate bond funds, with the liquidity and certainty of money market funds; and
- Benefit-responsive liquidity, meaning participants can transact at contract value (principal plus accrued interest).
Stable value funds have often been a cornerstone of many workplace retirement funds and today, eight in 10 DC plan sponsors offer stable value as a capital preservation option, including a third who offer stable value and money market funds.i Stable value returns are generally negatively correlated with equity investments, so they protect retirement savings from market swings and shocks. Today, most DC plan sponsors (82%) offer stable value funds to retirement plan participants as a retirement savings option.ii As of December of 2021, there was $902 billion invested in stable value retirement funds.iii
The Forgotten Investment
Despite stable value funds’ otherwise solid and secure investment returns, they remain a “forgotten” investment vehicle. They are generally not promoted by plan sponsors, and auto-enrollment for most DC plans does not include stable value fund options. Many plan sponsors and participants also lack access to stable value funds, unless they belong to a qualified U.S. retirement plan. Stable value funds’ crediting rate aspect is also poorly understood; it involves a complex formula where the interest rate earned on the contract value (principal plus accrued income) is expressed as an effective annual yield.iv It’s also important to note that money market accounts, generally more accessible and promoted by plan sponsors, perform poorly against stable value funds over time. Most stable value portfolios are built around intermediate duration bonds, which have historically offered higher returns than the shorter-duration instruments that money market funds are required to invest in.v Stable value funds also offer lower volatility than money market funds, due to the previously mentioned crediting rate, which amortizes market gains and losses over the duration of the assets backing the stable value contract.vi
Although plan sponsors are aware that most investors are largely unfamiliar with stable value funds and their utility, they have made efforts to educate clients on their advantages and to make them part of the ongoing discussion regarding individual retirement decisions.
Retirement plan participants will vary their objectives in terms of risk appetite, time horizon, and desired lifestyle post-retirement throughout their careers. While younger plan participants tend to have heartier risk appetites and the time horizon for more aggressive equity investments, older plan participants and those approaching retirement often prefer target date funds and more conservative fixed-income options. But for plan participants of all stages, stable value funds will continue to play a key role in helping them achieve the greatest total return for their retirement savings, while preserving principal in the most turbulent of times.
i MetLife 2022 Stable Value Study: Broadening the Scope of Stable Value’s Volatility Reduction, pg. 3
iii ”How to Evaluate Stable Value Funds,” PlanSponsor, April 2021
iv “Stable Value Crediting Rates – How They Work, How They Are Calculated,” by Galliard Capital Management, Inc., 2015
v Stable Value vs. Money Market Funds, MetLife Retirement and Income Solutions, 2021