PLANSPONSOR - June/July 2018 - 51

Among capital preservation options,
the current appeal is simple: For the
five years ended this past December,
stable value funds credited participants
with income averaging 2.5% of assets
annually, according to the Stable Value
Investment Association. For the competition,
yields on money market funds have
been close to zero since the financial
crisis. Moreover, regulation changes have
forced some money market funds to give
up their constant net asset value of $1.
Where the funds are offered, just
9% of today's participants choose them,
vs. 15% who choose stable value, says
Vanguard.
Investment managers have been
working on alternatives to stable value
funds that are competitive on yield, in the
form of high-grade bond funds with very
short maturities. " A fund like that can give
sponsors flexibility to extend duration
and pick up yield, depending on the position
of the yield curve and their comfort
level, " Czochara observes. Northern Trust
Asset Management has recently offered
such a fund, although just two of its 50
top clients have used it to replace stable
value or money market options.
She concedes, however, that the
incremental yield of an ultrashort bond
fund is likely to be small and that stable
value has the advantage of a constant
NAV. " We continue to have the dialogue, "
she says, " but if sponsors had a stable
value fund before the financial crisis, they
would likely [rather] consider returning to
it than going the ultrashort route. "
In the early days of DC plans, stable
value funds were designated as many
plans' default option. Today, target-date
funds (TDFs) are nearly universal as a
default choice, according to Vanguard.
So who are today's owners of stable
value? " Stable value still has a role as a
capital preservation fund, " Czochara
says. " During the financial crisis, participants
fled to safety from other assets, and
we even saw that in February, when the
U.S. equity market fell 3% on two consecutive
days. "
Why Use Them?
" From our recordkeeper arm, we see
that the majority of stable value account
holders are between ages 40 and 70, and
Baby Boomers in particular represent
over half the assets, " Luna says. " That's
what you would assume-that older
investors are investing for lower volatility.
And they have gone through two
big market crises, so they have an appreciation
for conservative investments. We
see some Millennials, too, although that
is not typical, " he adds.
Given the dominant share of TDFs
as a default, who are the likely owners of
stable value in the future? One prospective
group is TDFs themselves. " For laterdated
or post-retirement series in custom
TDFs, some managers devote high allocations
to as much as 20% cash, depending
on whether they offer defined benefit
[DB] pensions, " Luna says.
" We have started to see adoption
of stable value in TDFs, both in custom
and off-the-shelf funds, " says Gary
Ward, head of stable value at Prudential
Insurance, in Newark, New Jersey. He
points out stable value's yield advantage
over money markets, and the lower risk
vs. intermediate bond funds provided
by the insurance wrap. " In TDFs, stable
value is more than just a replacement for
cash, as it can enhance the fixed-income
sleeves by taking out some of the risk, "
Ward contends.
Another group of stable value candidates
is the constant flow of participants
KEY POINTS
* Plan sponsors like stable value for the steady net asset value and yield
advantage over money market funds, once they have the knowledge
to understand the funds' complexities.
* For the five years ended this past December, stable value funds
credited participants with income averaging 2.5% of assets annually,
according to the Stable Value Investment Association.
* The likely owners of stable value in the future are participants in either
custom or off-the-shelf target-date funds, participants approaching
retirement and Millennials.
crossing into the red zone approaching
retirement. Northern Trust surveyed
300 retirees and 1,000 workers last year
on their retirement views and posed a
question on the appeal of investments
with varying risk and return. One choice,
offering a potential return of just 2%
annually but no downside-more or less
the terms of today's stable value funds-
was preferred by 32% of the retirees, but
also 20% of the current workers.
Millennials could be a third
source of new business for stable value.
Researcher Cerulli Associates has also
surveyed on the risk preferences of
participant age groups-summarized in
its 2017 white paper " Rethinking Risk for
U.S. Millennials. " A large swath of young
investors in the survey-82% of those
under 30 and, in fact, large proportions
of investors of all ages-said they were
willing to sustain periods of underperforming
the market, if it would protect
their portfolios from significant losses.
Cerulli offers two recommendations
to fund providers and plan sponsors. One
is to better school young investors on the
range of market environments they are
likely to encounter over the long haul
and prepare them for that roller coaster.
" Alternatively, " Cerulli writes, " providers
could ... differentiate themselves by
altering the default equity exposure of
the portfolios to reflect the actual risk
preferences of most younger investors. "
That is a radical proposal in an equityoriented
world. -John Keefe
PLANSPONSOR.com June-July 2018 51
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