Interest Grows in Finding New Uses for Stable Value

PLANADVISER: What are the primary reasons defined contribution plan sponsors offer stable value as a capital preservation option?

Thomas Schuster: The No. 1 reason would be strong results. Stable value options in retirement plans have a 50-year track record of preserving principal and providing a predictable and competitive return on investment no matter what the market conditions. Over those years, we’ve had six recessions, a global pandemic and periods of both rising and falling interest rates, and stable value as an asset class performed as designed and provided value to participants.

The second reason, I would say, is that participants value the asset class. The 2008/’09 financial crisis and the pandemic created a lasting sensitivity to market risk among plan participants. Using stable value in a retirement plan as part of a diversified asset-allocation strategy is a predictable, low-risk way to grow and protect retirement savings and navigate market conditions.

Warren Howe: In MetLife’s 2024 Stable Value Study, 83% of plan sponsors viewed the long-term historical performance of stable value as the primary reason for it being a good capital preservation option for their DC plan. Additionally, 95% of plan sponsors considered stable value to be a valuable option for participants who are seeking a haven from market volatility, and 92% of advisers agreed.

Schuster: Finally, stable value is truly unique. Stable value investments are available only in tax-qualified plans, such as defined contribution plans. They are uniquely structured to maximize returns while preserving principal.

These are likely the reasons 82% of DC plan sponsors, according to our study, currently offer stable value funds, and that percentage has held steady since our 2022 study. In addition, 92% of plan sponsors in the current study said they are not planning to make any changes to their stable value offering.

PA: How important is the role advisers play in a plan sponsor’s decision to offer stable value?

Schuster: Plan advisers assist sponsors in selecting a diverse range of investment options to align with a plan’s investment policy statement and the needs of participants. Many also provide ongoing investment monitoring and make suggestions to maintain a high-quality investment menu.

Most plan sponsors in the MetLife 2024 Stable Value Study said they added stable value as their DC plan’s capital preservation option because it was recommended by their adviser, with 84% saying that. So, advisers play a critical role in a plan sponsor’s decision to offer stable value.

In complementary findings, the top reason 76% of plan advisers gave for recommending stable value is that it historically has offered better returns than money market or other capital preservation options have.

PA: What factors are most important when advisers recommend, and plan sponsors select, a stable value fund?

Howe: There are many factors to consider when selecting any investment option for a DC plan, and one would expect plan advisers and sponsors to consider all these factors in totality and not any one in isolation.

The results of our survey showed that to be the case, with several factors rated especially high. The most important factor, selected by 93% of advisers, was the financial strength or creditworthiness of the wrap contract issuer. That was slightly more than the diversification by the underlying asset manager and the credited rate that participants see—each selected by 89% of advisers.

PA: How can the principles of stable value be applied in new ways to help plan sponsors address market volatility for DC plan participants?

Schuster: One of the continuing trends in DC plan investment lineups is the growth of target-date funds; however, the 2024 MetLife Stable Value Study found that only 4% of advisers and 19% of plan sponsors are very comfortable with TDFs’ suitability for addressing market volatility for those in retirement.

This is important because those in retirement are typically the most vulnerable to the impact of market volatility as they balance the need for investment growth with drawing down their assets. Sequence of return risk—the risk of negative market returns occurring leading into retirement or in early retirement—is a significant concern for this group.

Looking at TDFs, we are starting to see a growing interest in using the volatility smoothing principles that stable value has delivered as a standalone investment option for 50-plus years.

A TDF could have a stable value contract that incorporates both fixed income and equity: When blended with non-stable-value equity, the combined structure has the potential to increase equity allocations and expected returns in TDFs without increasing volatility, or to maintain returns while lowering volatility. This creates quantitatively superior risk-return outcomes for participants.

PA: In MetLife’s latest Stable Value Study, were plan sponsors more interested in lowering volatility while maintaining returns, or enhancing returns while maintaining volatility?

Howe: As part of our study, we presented plan sponsors with two examples of applying the volatility smoothing principles of stable value to TDFs. We found plan sponsors were equally interested in both.

In the first example, the TDF was able to deliver comparable returns net of fees while reducing overall volatility by approximately 40% for certain vintages—for participants within 10 years of retirement and in retirement. The study found that 95% of plan sponsors would be interested in that option.

In the second example, the TDF was able to enhance returns by 60 basis points on a net basis for an incremental fee of 15 basis points for the wrap, while keeping volatility constant. The study found 94% of plan sponsors were interested in that option.

Schuster: We also found that when you back up examples with specific numbers, the percentage of respondents very or extremely interested increases dramatically. The study found that 54% of plan sponsors and 45% of advisers were very or extremely interested in a TDF solution that provided comparable returns while reducing volatility.

Howe: We’ve conducted the study during differing market environments, and, each time, we found a significant number of plan sponsors understand the long-term benefits a stable value option provides in their DC plan investment lineup. But now it’s interesting to see the openness to using what stable value has done historically in new ways.

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MetLife’s Retirement & Income Solutions division, the company’s institutional retirement business, issues products through Metropolitan Life Insurance Company (MLIC) and Metropolitan Tower Life Insurance Company (MTL), two wholly owned subsidiaries of MetLife, Inc. Retirement & Income Solutions issues products for transferred pension liabilities, stable value, institutional income annuities, benefits funding and structured settlements.

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