Don’t call it a comeback. Recent money market regulatory changes have plan sponsors and advisors looking for suitable alternatives, and stable value may be it.
Despite a rocky road for the product recently, “a growing numbers of plan sponsors and intermediaries may be open to embracing stable value in the coming years,” according to a new white paper from Prudential Retirement.
The white paper, “Expanding the Case for Stable Value,” which reportedly was based on the survey of 400 plan sponsors and 300 intermediaries, identified the factors that motivated them to adopt stable value and recommend the asset class to others. Those that had not yet embraced stable value were also asked to identify the barriers to adoption. Key findings include:
- The top two reasons for stable value adoption were capital preservation and steady returns
- 54 percent of plan sponsors and 75 percent of intermediaries cited capital preservation as their main reason for adoption
- 54 percent of plan sponsors and 70 percent of intermediaries cited steady returns as a deciding factor in adoption
- Stable value recommendations were primarily based on three factors: 1) the returns the asset class delivered versus other fixed-income investments 2) their role in boosting plan participation and deferral rates, and, 3) for the intermediaries, their liquidity for participants.
- Non-adoption of stable value stemmed mainly from three factors: 1) perceptions about cost 2) their performance relative to equities and other non-fixed income asset classes, and 3) the notion that they may be difficult for plan participants to understand
- 53 percent of plan sponsors and 69 percent of intermediaries saw the cost of stable value funds as a challenge.
The white paper also found that another reason for non-adoption might be that stable value is less well known than other investment options, including money market funds and mutual funds—and familiarity is a key driver of acceptance for most investment products in the marketplace.
“Over the past 40 years, stable value funds have performed remarkably well, even through economic downturns, like the financial crisis in 2008,” Gary Ward, head of Stable Value at Prudential, said in a statement. “Yet, the number of DC plans offering stable value funds remains at less than 50 percent, leaving significant numbers of plan participants without access to the asset class.”
Greater use of stable value in the future is inevitable due to a number of factors, according to the white paper. First, plan sponsor and intermediary attitudes toward broader use of the asset class are favorable. Among plan sponsors, 55 percent of non-adopters plan to offer stable value in the future, while only 9 percent of adopters are at risk of getting rid of it. For intermediaries, 30 percent of those who recommend stable value to clients are doing so more often today than they did a year ago, and 35 percent expect this trend to accelerate over the next three years.
Another factor is the changing regulatory environment for money market funds. Beginning in October 2016, the U.S. Securities and Exchange Commission 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.
Other factors that will drive demand for stable value in the future include its potential to be added to target-date funds, which 74 percent of plan sponsors who offer TDFs said they would do.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
