“Tried and true” speaks volumes about the core values of a lesser-known defined contribution plan option: stable value funds.
Stable value funds have been around for decades and have served as a strong investment option for plan sponsors looking to provide a safe retirement savings offering.
While these core qualities have always been true, recent changes to money market funds enacted by the Securities and Exchange Commission (SEC) last fall have caused many plan sponsors to take a fresh look at a stable value fund alternative.
As you look to incorporate stable value funds into your clients’ 401k portfolios, here are three key advantages to highlight:
Attractive yield in an uncertain marketplace
Stable value funds have historically offered attractive yields as compared with their money market fund brethren. This has been especially true during the low-interest rate environment of recent years. Furthermore, new SEC restrictions will likely make it even tougher for money market fund returns to keep up in the future.
Money market funds are now forced to choose between having their investment options severely limited or being required to restrict participant transactions for up to 10 days during times of market stress.
In contrast, stable value fund contracts are issued by banks and insurance companies and are not subject to the new SEC regulations. Stable value funds are still able to ensure that participants receive book value on any transactions regardless of market conditions. This book value guarantee allows participants’ investments to safely earn yield without being impacted by marketplace volatility.
Guaranteed crediting rate
Depending on the carrier, a fund’s crediting rate is typically contractually guaranteed and known to participants in advance.
The promise that the crediting rate will never fall below a stated minimum also can be an advantage for plan participants who have been hurt by the financial instability of the marketplace and want a predictable return on investment for their hard-earned savings.
This guaranteed crediting rate can help garner more yield for participants who are able to invest in stable value funds longer-term, allowing their investments to gradually grow in a safe environment.
Backed by a diversified portfolio
Another benefit that makes stable value funds a reliable option is that the products are backed by a high-quality, well-diversified portfolio of fixed-income instruments. This generally includes government bonds, mortgage-backed securities and corporate bonds. These types of diversified investments allow the stable value fund carrier to reduce the risk of market volatility and its impact on plan participants’ yield.
As more plan sponsors begin to see the impact of the SEC money market reform, the ability to discuss the advantage of a stable value fund alternative will become increasingly important. Standing the test of marketplace volatility, stable value funds continue to be a strong go-to option to provide plan participants with a strong yield through a low-risk investment vehicle.
Kent Bartell is the director of investment research at The Standard. He has more than 25 years of experience in portfolio management and financial services. Kent holds Chartered Financial Analyst and Associate of the Society of Actuaries designations. For more information on stable value funds, call 844.239.3561.
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.
