individually-managed fund? Who will be the asset managers?
Who provides the stable value wrap contracts? What’s the
track record of the fund or of the manager? If it’s a pooled
fund, how well-diversified is it? What’s the management style?
What exit provision is best for participants? Does the manager
hold more cash or is it fully invested? Those are some of the
considerations plan sponsors need to keep in mind.
PS: Are plan participants finding stable value funds an at-
tractive capital preservation option?
Schuster: Many plan participants value preservation of principal. Stable value funds not only offer safety but also give participants returns that far exceed those of other capital preservation options. In a representative stable value portfolio we
monitor at MetLife, $100 invested in stable value for the 10-year
period ending December 31, 2016 would have grown to $134,
but if the $100 had been invested in money market instead, it
would have grown only to $108—a difference of 24%.
If we look at earnings alone, those in stable value were four
times greater. In fact, stable value outperformed money
market in every quarter over the 10-year period, with lower
volatility over the period as measured by standard deviation. Participants in stable value would have experienced
increased purchasing power, but those in money market lost
ground to inflation.
Howe: We’ve even seen some longer-tenured participants
use the funds as a way to delay taking their Social Security
benefit, and thus increase the benefit amount they’ll get when
they actually do file, because they’ve built up assets in stable
value as a part of their nest egg that they know will provide
purchasing power they can depend on in the years before
they commence Social Security.
PS: Why is now a good time for sponsors to consider of-
fering stable value, or adding it to their fund lineup if they
don’t currently have it?
Schuster: On October 14 of last year, rules from the Securities and Exchange Commission [SEC] regulating money
market funds went into effect, and these reforms have led to
changes in the structure of the funds and forced plan sponsors to re-evaluate the capital preservation options for their
PS: How does the interest rate environment impact stable
Howe: Stable value is designed to perform well in all interest
rate environments. As rates start to move up, positive cash
flow will be invested at higher rates, which will move the crediting rate upward. In contrast, money market fund investors
may not see the full benefit of increases in short rates. For
years, money fund managers waived fees to avoid negative
yields. As rates have started to rise, fee waivers have declined,
so money fund investors have not gotten the full advantage
of short rate increases. In fact, many funds have the right to
recapture the fees they waived in the past.
PS: What are some of the innovative ways that plan spon-
sors are incorporating stable value as part of their DC
Schuster: As the number of DC plans offering target-date funds
[TDFs] with stable value continues to increase, we are starting
to see growing interest in stable value as the fixed income component of a TDF on the part of other target date fund sponsors.
Just as stable value is superior to money market as a stand-alone plan option, it’s also superior to money market funds and
short-term bond funds as a component of a TDF.
Stable value balances, and the way the product is designed,
are not subject to the same level of market volatility as are
investments that are held at market value. Including stable
value should allow a TDF to make a higher allocation to investments with a higher expected return, while keeping expected
volatility the same.
PS: Anything else you want to add about MetLife’s experi-
ence in the stable value marketplace?
Howe: MetLife is one of the leading providers of stable value
solutions in the market and we’re one of the top three issuers.
We’ve been doing this for 40 years or so; we were the first
one to launch a separate account stable value product back in
1989. We stress our history and experience as one of the top
wrap providers in the market. Based on the solutions we offer,
we can work to customize something that works for each plan
sponsor a little bit differently.
Schuster: I agree. At MetLife, we don’t have the one-size-fits-all mentality. We like to customize, to the extent we can, to
meet the individualized needs of plan sponsors and pooled
fund sponsors and, in turn, their participants.
PS: What is the future of stable value?
Schuster: The future looks promising because the features
of stable value—principal preservation with earnings that
exceed inflation—are features that resonate with plan participants. Since stable value seems certain to continue to meet
those needs, I believe participants will continue to invest in
stable value. Strengthening TDFs by substituting stable value
for short fixed income will also create an opportunity for the
asset class to keep growing.n