We thought 401(k) plan advisors were done with stable value funds; we were wrong, and money market changes will bring them back with a vengeance.
A vast majority (82 percent) of 401(k) plan sponsors who are familiar with the new rules governing money market funds feel stable value is a more attractive capital preservation option for plan participants.
“MetLife’s 2015 Stable Value Study” finds most stable value fund providers and advisors predict the use of money market funds in defined contribution plans will decline over the next few years.
The leading reason plan sponsors offer stable value is to provide a capital preservation option (65 percent); guaranteed rate of return (50 percent); and, better returns compared to money market and other capital preservation options (49 percent). Among plans with more than 100 participants that added stable value in the past two years, 77 percent offer stable value because it offers better returns than money market and other capital preservation options, up significantly from 38 percent in the “MetLife 2013 Stable Value Study.”
However, despite recognizing stable value as a more attractive capital preservation option, MetLife found there is a need for better communication about the strong performance of stable value–only 17 percent of plan sponsors and 23 percent of plan advisors realize that stable value returns have exceed inflation over the past 25 years.
“Stable value has a 40-year track record of performing exceptionally well–no matter what the market conditions,” Thomas Schuster, vice president and head of Stable Value and Investment Products with MetLife, said in a statement. “Educating plan sponsors and participants about the advantages of stable value will not only help move plan assets to stable value, but will also help retain assets in qualified retirement plans, offering participants enhanced retirement income security.”
When it comes to stable value’s performance against money market funds, the study found that almost half of sponsors (47 percent) are unaware that stable value returns have outperformed money market returns: 22 percent believe that stable value and money market returns have been about equal and 21 percent don’t know how the returns compare. Additionally, 4 percent actually believe that money market funds have performed better than stable value over this time period.
“Two rounds of reforms have reduced money market’s expected returns and made them less customer friendly,” Warren Howe, national director of Stable Value Markets with MetLife, added. “The reforms have also highlighted the fact that money market funds are designed for general retail use. In contrast, stable value funds, which are designed specifically for employer-sponsored plans, are uniquely structured to maximize returns while preserving principal.”
In addition to these reforms, recent litigation will also likely affect plan sponsors’ decisions about which capital preservation products to make available to DC plan participants. So far, six months after a $62 million class action settlement, followed by a recent U.S. Supreme Court ruling in Tibble v. Edison, 20 percent of plan sponsors are considering alternatives to money market. Schuster believes others may follow suit, stating, “Plans that continue to offer money market and not stable value are potentially exposing themselves to enhanced litigation risk.”