The Stable Value Conundrum

For years, fewer than half of defined contribution (DC) plans have offered stable value funds. It’s not because plan sponsors and plan advisers don’t know about the asset class. And it’s not because they don’t know about stable value’s benefits: most people know the funds offer steady returns and principal protections.

Prudential Retirement set out to understand the barriers to adoption, and found in its new white paper, “Expanding the Case for Stable Value,” that growing numbers of plan sponsors and intermediaries may in fact be open to embracing stable value.

While the research didn’t yield any top-level surprises, says Gary Ward, head of stable value at Prudential Retirement, it allowed Prudential to gain insights from key decision makers and influencers across the retirement landscape. In particular, Prudential understood more deeply the opportunities for growth of stable value in DC markets. Prudential and the investment industry need to put forth more effort on articulating the value of this asset class, Ward tells PLANADVISER, while addressing perceived costs.

“Some of the differences between those adopting and recommending stable value, and those not taking advantage of stable value were more glaring than I expected,” Ward says. 

In some ways, those who don’t recommend stable value may be looking at the wrong factors. For example, those recommending stable value cite its returns versus other fixed-income investments, while non-adopters cite stable value’s performance relative to equities and other non-fixed income asset classes, Ward points out. “Those recommending stable value cite its role in boosting participation and deferral rates of participants, and the liquidity provided to participants, while those not adopting think it may be difficult for plan participants to understand.”

For Prudential Retirement, the research opened up an evaluation on how they tell the story of stable value’s benefits to an individual investor. “I didn’t expect to hear as much of as we did about benefits, that plan sponsors and intermediaries really see the connection of stable value to broader participant engagement,” Ward says. “They see it as a driver of higher participation and deferral rates.”

One key to educating plan sponsors and investment committees about stable value is a deeper articulation of the value equation of the asset class, according to Ward. “We need to emphasize all of the benefits of stable value, such as the history of bond-like returns with low volatility, capital preservation, liquidity to participants, and potential to drive higher participation and deferral rates,” Ward says. “And we need to continue analyzing real or perceived concerns around cost and complexity.”

Awareness alone is not the issue. Prudential’s data shows that almost all advisers (91%) and most plan sponsors (82%) are somewhat to very familiar with stable value. “This is about providing the right information for key decision makers to evaluate stable value versus other conservative options,” Ward says.

Prudential contends that several factors mean that greater use of stable value is inevitable. First, plan sponsor and intermediary attitudes toward broader use are favorable. Among plan sponsors, 55% of non-adopters plan to offer stable value in the future, while only 9% of adopters are at risk of getting rid of it. For advisers, 30% of those who recommend stable value to clients are doing so more often today than they did a year ago, and 35% expect this trend to accelerate over the next three years.

Another factor is the changing regulatory environment for money market funds. Beginning in October, the Securities and Exchange Commission (SEC) will allow money market funds to impose redemption fees, or temporarily halt redemptions, when the funds fall below certain liquidity thresholds, which could spur more interest in stable value funds as an alternative. Sixty-three percent of sponsors that currently offer money market funds and 49% of advisers who currently recommend them say the SEC ruling is likely to drive changes in their allocation to money market funds.

Prudential surveyed 400 plan sponsors and 300 intermediaries to identify the factors that motivated them to adopt stable value and recommend the asset class to others. Plan sponsors and intermediaries that had not yet embraced stable value were also asked to identify the barriers to adoption. Plan sponsors refers to companies with 401(k), 403(b) or 457 plans, with $100 million to $500 million in total plan assets. Intermediaries refers to retirement plan advisers, registered investment advisers (RIAs) and broker/dealers, many with national or regional brokerage firms or wirehouses, most with significant business with clients that have less than $100 million in total plan assets.

“Expanding the Case for Stable Value” can be accessed from Prudential’s website.