PLANSPONSOR - June/July 2018 - 5

Stable Value
Is Your Plan Offering the Right
Capital Preservation Option?
S
table value funds are popular as a
conservative investment option in
defined contribution (DC) retirement
savings plans-all the more so since
regulations
impacting money market
funds took effect in 2016. To learn more
about stable value's enduring appeal-
and why it makes sense in today's investment
climate-PLANSPONSOR
spoke
recently with Tom Schuster, vice president
and head of Stable Value and Investment
Products at MetLife, a leading stable value
provider, and Warren Howe, MetLife's
national director for Stable Value Markets.
PLANSPONSOR: If you're a plan
sponsor offering a money market fund
as your capital preservation option, is
this a good time to consider replacing
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, stable
value outperformed inflation by more
than one percentage point per year, while
money market funds lagged inflation by
120 basis points [BPS]. 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.
PS: 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 an attractive
return on investment, no matter what the
market conditions. Along with a return
that outpaces inflation, 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.
PS: What
are
investment
advisers
saying? Wouldn't they be recommending
stable value if they bought
into these arguments?
Schuster: In fact, advisers do 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% of sponsors who offer stable
value, and 67% who offer money market,
said their advisers recommended those
options to them. However, 90% of
advisers
report
recommending stable
value very often, while 86% 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.
SPONSORED SECTION
Tom Schuster
Warren Howe
PS:
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
interest
see
in using stable value as
growing
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
gives target-date fund managers two
choices, either to increase returns while
reducing risk, or to reduce risk without
decreasing returns. This would benefit
participants. It's worth noting, by the
way, that stable value can work in either a
custom or off-the-shelf TDF structure.
PS: What's holding some plan sponsors
back from offering stable value? Is
there a need for better education?
Schuster: We 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% did not know that stable
value returns exceeded inflation over that
same period.
PS: 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. n
PLANSPONSOR - June/July 2018

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