PLANSPONSOR - June/July 2020 - 40

INVESTMENT FOCUS
A Time for Caution
Stable value is a popular conservative option
" W
e all need somebody to lean
on, " singer-songwriter Bill
Withers told us in 1972. And
during the market strife brought on by
COVID-19 in this year's first quarter, many
investors in defined contribution (DC)
plans sought support from their plan's
stable value account. " The cash flows into
stable value were very positive, especially
from older investors-even more so than
during the great financial crisis [of 2008], "
says Tony Luna, head of the stable asset
management team at investment manager
T. Rowe Price in Baltimore.
The Stable Value Investment Association
(SVIA), a trade group in Washington,
D.C., reports that stable value assets saw
growth of 6% for the quarter.
Stable value funds are complex financial
mechanisms and present a complicated
product choice for sponsors. But of the two
prevalent choices in DC plans for capital
preservation-the other being money
market funds-returns to stable value have
dominated since that last major downturn
and offered a smooth ride for participants
choosing to avoid riskier markets.
Stable value and similar accounts
were some of the first investments available
in defined contribution plans and still
fill an important role. About two-thirds of
plans offer a stable value account as an
option, and, in 2018, about 10% of participants
had holdings in one, says Vanguard
Group's " How America Saves 2019. "
In the aggregate, they make up about
10% of DC participants' portfolios, says
Gina Mitchell, SVIA president.
The chart explains why stable value is
popular, making a head-to-head comparison
of money market funds and stable
value accounts, along with another conservative
fund option, short-term bonds.
Prior to 2008, all three offered returns
above 5%, but yields on money market
funds collapsed in 2008 and 2009, owing
to the massive monetary easing by the
Federal Reserve. Their yields managed a
40 PLANSPONSOR.COM June - July 2020
Art by Juliette Borda
recovery in 2016, but this year fell again
to near zero, as the Fed undertook an
even larger easing program to battle the
economic effects of COVID-19.
Returns for the period were far higher
for short-term bonds than for money
markets, but rather volatile for a supposedly
conservative asset class. The mean
return for short-term bonds over the full
period was about the same as that for stable
value-about 2.5%. But note that 2013's
result was near zero.
Owning the bonds directly gave
investors a far bumpier ride: For 60 of the
156 months during the period, monthly
returns on a directly held bond portfolio
were negative. Meanwhile, participants
holding stable value accounts saw steady
increases every month.
What makes stable value so stable is its
unusual structure. In a bond mutual fund,
the net asset value is set by a daily valuation
at prevailing market prices, which respond
immediately to swings in the economy,
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