Stable Value Players Meet Amid Recovering Market, Decumulation Push

Stable value fund industry players met in Washington D.C. this week in what should be a more attractive interest rate environment for the tax-qualified-only retirement plan investment vehicle.

The Stable Value Investment Association ran the event, with sessions focused on how interest rates, demographics and politics will affect the market for stable value funds, a capital-preserving defined contribution investment that includes an insurance-backed guarantee. The industry has been challenged in recent years, as the Federal Reserve hiked interest rates, making money market funds a more attractive option than stable value for many investors looking for a conservative investment with a solid return.

Zach Gieske, president of the SVIA, says heightened rates resulted in fewer transfers into stable value when compared with more typical market environments. In coming months, the association expects to see cash flowing back into stable value at more normalized rates.

“We view the market pretty optimistically,” Gieske says. “We obviously have been getting lots of questions during these two years about stable value versus money market. We have reiterated the point that stable value is for a long-term investment, which is well suited for retirement plans.”

Before the conference, Gieske said attendees would hear from recordkeepers about what they have seen of stable value flows, as well as what to expect if rate drops continue and money market funds become less attractive.

According to SVIA’s most recent data, there is $856 billion invested in stable value funds as of the end of June. In comparison, tax-exempt money market funds in both retail and institutional investments stood at $130.3 billion as of October 9, slipping by $67 million since October 2, according to the Investment Company Institute.  Money market funds across all investment types stood at $6.47 trillion as of October 9.

Andrew Erman, senior vice president of stable value solutions for Transamerica, points out that many stable value fund products have already readjusted to the higher-rate environment. A plan sponsor looking to introduce stable value funds now, he says, can already offer a better rate than money market funds, and those with existing stable value will catch up eventually, no matter how the Fed moves.

“It’s not just rate cuts,” says Erman, who is also on the board of the SVIA. “One of the great things about a big chunk of stable value products are that they are self-healing. … The products are going to rise, even if the Fed does nothing, and at some point, the product is going to catch up.”

Erman says the “tipping point” between stable value and money markets will be different depending on the plan, but, historically speaking, stable value funds will win out for a longer time horizon.

Decumulation

Meanwhile, the SVIA is looking at ways to make further inroads into DC investing. One of those focuses, according to Gieske, is how stable value can be part of retirement saving decumulation—a trending area for many plan advisers and sponsors. Gieske makes the pitch that the product is “unique in the space” because it offers guaranteed principal, along with liquidity.

“From a participant standpoint, it helps them manage volatility near and in retirement,” he says.

In association with the conference, Mercer released a white paper detailing how plan sponsors can use stable value funds as a retirement income solution. Mercer noted that, as of the most recent data from 2021, almost 85% of stable value assets were held by participants aged at least 50. That suggested to the company that “a significant block of retirees are already leveraging stable value as a decumulation vehicle, even without targeted guidance suggesting this course of action.”

The paper recommended that plan sponsors dedicate a “segment of the retirement plan” on decumulation, with stable value funds as one of the investments matched with options such as short-term bond funds and target-date funds with embedded annuities.

How all this will be provided to participants is another area of discussion for members of the SVIA. At the moment, stable value funds are generally only used as a qualified default investment alternative for the first 120 days after a participant joins a plan, notes Gieske. Thereafter, they tend to be offered via a customized target-date fund, a managed account or an opt-in decision by a participant. That can work for the stable value decumulation play, but it does not fit target-date mutual funds, a large part of the DC market.

Gieske says the industry is now considering ways that “stable value could be used as a QDIA for retirees. It’s something that we are working on with legislators to discuss whether that is an appropriate option or not.”

Complex Vehicles

Stable value funds come, of course, with additional fees, as well as timing and contractual restrictions, as pointed out in a recent white paper from Fi360 written by Matthew Gnabasik, an ERISA consultant.

Gnabasik wrote that stable value fees can be “confusing,” in part because they differ by product and can include investment management fees, insurance company wrap fees, operating fees and trustee fees. Depending on the insurance setup, the insurer may be making profit on the “‘spread,’ i.e., where the investments generate more in profit than the cost of deposits,” and therefore will not be readily accessible to the plan fiduciaries.

More specifically, fees for investing in stable value products typically range from 25 basis points for large plans to 100 basis points for small plans, according to Fi360, a Broadridge company.

On the participant side, stable value funds also carry a contractual provision that requires an average a 90-day “equity wash” period, in which the investment must be held in a product deemed to not be competitive. On the plan sponsor side, there can be contractual timelines for exiting a strategy, as well as market value adjustment considerations.

In 2011, the U.S. Government Accountability Office published a report raising concerns about the restrictions on accessing stable value funds, the risks from interest rate fluctuation, and allegations of a lack of communication and education for plan sponsors and participants. In an extensive 2009 report, the ERISA Advisory Council called for extensive review of the products by plan fiduciaries before implementing them.

More recently, the SVIA sent a statement to that ERISA council promoting stable value investments as part of retirement income options.

On Wednesday, the association wrapped its fall session in D.C., with the next forum scheduled for April 2025. Members will meet in New Orleans, when, if signals from the Fed hold true, they will be operating amid even lower interest rates, potentially providing for stronger inflows.