An uncertain economic market is rattling plan sponsors–and they are seeking ways to calm the choppy waters.
A just-released MetLife study found that 70% of defined contribution (DC) plan sponsors are concerned about the impact of market volatility on retirees, especially those plan participants within 10 years of retirement (67%). The 2022 Stable Value Study also cited that more than half (52%) are concerned about those plan participants more than 10 years away from retirement.
“Market volatility remains a concern when it comes to participants’ retirement security…”
Tom Schuster, MetLife Senior Vice President
“Market volatility remains a concern when it comes to participants’ retirement security,” says Tom Schuster, Senior Vice President and head of Stable Value and Investment Products with MetLife. “Having DC plan solutions that are designed to help mitigate the effects of volatility is critical–especially for those nearing or already in retirement, who typically have a lower risk tolerance and a limited time horizon to recover from market losses.”
Stable value is standout option
According to the report, stable value remains the most popular capital preservation option for plan sponsors, with 82% offering the option. Nearly all DC plan sponsors (98%) say they are not planning to make any changes to their stable value offering.
An impressive 91% of stable value fund providers say plan sponsors chose stable value because its returns are better than those of money market funds and other capital preservation options. In fact, the use of money market funds has declined significantly since 2015, with less than half of sponsors (48%) offering the funds as a capital preservation option today (down from 62% in 2015).
TDFs continue dominance
With more than $2 trillion dollars of retirement savings invested in target date funds (TDFs), they are increasingly dominating DC plan investments. MetLife says that stable value enables TDF providers to optimize the risk/return profile of their funds to fit the profile of the plan participants invested in TDFs. Stable value continues to be an attractive option with 89% of plan sponsors and 97% of plan advisors saying that they would if the TDF provider could utilize a solution, such as stable value, that generates net returns four times more than the cost associated with delivering those additional returns (e.g., 60 basis points enhanced net returns for a cost of 15 basis points) while keeping volatility constant. E
Eighty-six percent of plan sponsors and 94% of plan advisors favor a solution that could maintain comparable returns, net of fees, while reducing volatility by approximately 40%.
“While TDFs may provide a simplified experience for plan participants, plan sponsors need to take a closer look at how these funds address the potential impact of market volatility,” says Warren Howe, National Director at Stable Value Markets. “In fact, the study found that nearly one in five plan sponsors (18%) are likely to say that it is very or somewhat common for plan participants to delay retirement due to experiencing market losses in their TDFs.”
He adds that the “volatility smoothing principles of stable value” can also be applied in TDFs, noting that this includes both off-the-shelf TDFs and custom TDFs, which may offer a better opportunity to implement the respective strategies.
“These solutions can significantly lower volatility while maintaining returns or, conversely, enhance returns while keeping volatility constant,” said Howe
And although the off-the-shelf TDFs are the most popular, interest in custom TDFs may be growing with more than a quarter of advisors saying that they are considering recommending or constructing custom TDFs for their plan sponsor clients. More than half of plan sponsors without a custom TDF say they would consider a custom TDF based on their advisors’ recommendation.
“By embracing solutions such as stable value in TDFs, plan sponsors can take steps to address their concerns about the impact of market volatility for retirees and near-retirees,” says MetLife’s Schuster. “With access to these solutions in TDFs, participants can take a ‘set-it-and-forget-it’ approach to their retirement with the security that their savings are protected against volatility.”