Thursday, August 3, 2017

11 Questions Employers Should Ask About Stable Value Funds

Stable value investments have been a core investment option in defined contribution retirement plans since the 1970s and are an attractive alternative to money market investments due to steady returns and principal preservation guarantees. Stable value funds have proven their worth to investors during the protracted period of low interest rates present since the recent financial crisis. Consider the following comparison of 2007-2016 calendar year total return for the Vanguard Federal Money Market Fund (VMFXX)[i] to the SBS MetLife Stable Value Fund.

1. What is a stable value fund?


Stable value funds are low-risk, capital preservation investment options available in employer-sponsored retirement plans and other savings plans. They are invested in high quality, diversified fixed income portfolios and feature protection against interest rate volatility through contracts from insurance companies or banks.

2. How popular are stable value funds when offered as an investment option in a retirement plan?

Within the SBS base of participant-directed plans, 11% of aggregate assets are invested in stable value. Stable value ranks third among major assets classes in popularity, behind equities (40% of assets) and target retirement date funds (35% of assets). Stable value’s low risk and low volatility, compared to fixed income and equity assets classes, appeals to conservative investors. Stable value’s performance has very low correlation to other major assets classes, which may make it a useful addition to a diversified portfolio.

3. Are there different types of stable value funds?

There are three types of stable value funds: traditional guaranteed investment contracts (GICs), separate account GICs, and stable value collective investment trusts (CITs). Traditional GICs are issued by insurance companies. Investors’ assets become part of the insurer’s overall pool of liabilities and are invested with all of the insurance company’s general account assets. Separate account GICs are group annuity contracts where the contract liabilities are supported by separate accounts of the insurance company (versus the general account). Separate account GICs provide the following advantages over traditional GICs: physical and legal separation from the insurer’s general assets/liabilities, investment flexibility, and control. Less commonly used CITs are essentially mutual funds without regulation by the Securities and Exchange Commission.

4. Why include a stable value option in a retirement plan?

The steady, predictable returns of stable value make it an ideal investment for those looking for a conservative investment option. It allows participants approaching retirement to protect potential retirement income while minimizing risk. Stable value’s appeal to very risk-averse individuals can potentially boost plan participation and deferral rates. A stable value offering fulfills plan fiduciaries’ responsibility under Employee Retirement Income Security Act (ERISA) §404(c) to offer an investment option with low volatility and high capital preservation.

5. How does stable value compare to money market funds?

Money market funds typically invest in bonds with shorter maturities than stable value; hence, they have a lower yield. Money market interest rates change daily according to the market, where stable value interest rates are normally reset by the issuer on a quarterly or annual basis. Money market funds do not feature the guaranteed minimum interest rate that is part of many stable value offerings. Some plan sponsors have been the subject of class action lawsuits for offering money market funds instead of a more competitive option.


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If you have any questions, or would like to begin talking to a retirement plan advisor for best fiduciary practices on including a stable value investment option in your retirement plan, please get in touch by email or by calling (855) 882-9177.

[i] Source: Morningstar.com
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