Stable Value (SV) is an important asset class in the defined contribution marketplace as measured by participant usage and percent of total DC assets. Despite its importance though, SV funds are still not well understood by most advisors and their clients.
A new research paper is written specifically for ERISA fiduciary advisors and intended to give a basic overview of different types of stable value products, how to evaluate their key features and what to look out for so a fiduciary advisor can feel confident making specific, due diligent recommendations about stable value products to clients.
For purposes of the paper, stable value products were divided into two types:
- Insurance company general accounts (GA) where the book value protection is provided by the full faith and credit of a particular insurance company, and
- Synthetic GICs or “pooled” products where a stable value investment manager runs an intermediate-term bond portfolio and the book value protection is provided by “wrap” providers.
There are other types of stable value products, like insurance company separate accounts, that are generally not available to smaller plans or products that blend the above distinction. For example, a pooled Collective Investment Trust (CIT) product that buys insurance company GICs for wrap protection.
By focusing exclusively on insurance company general accounts and CIT pooled products, not only do we learn a lot about stable value, but we also deal with a large percentage of available product.
Stable value stats and facts
Here are some basic facts: stable value is an important asset class currently representing about 11.7% of the $7 trillion in total DC assets. According to Callan’s DC Index, more than 60% of the 100-plus largest defined contribution plans tracked use stable value funds.
Additional facts from EBRI include:
- From 2007- 2015, stable value has ranged between 6% – 15% of total 401k plan assets. (Note: Prior to this time period, stable value assets were even higher).
- The average allocation to stable value ranges across different participant salary bands from 11% – 13.8%.
- SV is found in about 50% of all 401k plans.
- For EEs older than age 50, stable value as a percent of total account balance is 13.3% and for EEs older than 60, the number jumps to 20.2%.
Download the full white paper here
From a participant perspective, stable value, like a money market fund, is considered a “safe” option inside of a plan. It provides a modest return and rarely, if ever, loses money because wrap providers, or the insurance company, protect the participant book value. But the differences end there.
Historically, stable value has generated a much higher rate of return than money markets. According to data from Callan, over the past 25 years, stable value funds have generated higher returns for all but one brief period before the 2008 financial crisis.
Taking advantage of this historical risk/reward premium advantage, good fiduciary advisors have included stable value in their clients’ portfolios for many years. And more recently, some advisors are intentionally redesigning their clients’ retirement plans to encourage retirees to keep some/all of their retirement savings in the plan in order to maintain access to stable value, as well as to take advantage of lower, institutionally-priced investments.
Because stable value funds are only available in ERISA plans (i.e., they are not available in the “retail” marketplace), retirees can continue to keep access to a “safe” investment option that has historically outperformed money market funds or bank CD products.
Whatever your reason for using stable value, few advisors spend much time analyzing the product.
Typically, they recommend either the recordkeeper’s proprietary fund or, if there is the ability to choose among several competing stable fund products, they rely solely on the crediting rate to determine which product to recommend.
In today’s post-DOL fiduciary rule world, this lack of due diligence and procedural process is no longer acceptable. Given the new environment, most advisors working in the ERISA marketplace today act in a fiduciary capacity, which not only means making recommendations in the best interests of clients, but the need to demonstrate proper due diligence.
The upshot is that conducting due diligence on stable value is now a basic requirement, because not doing so puts clients at risk and places the advisor at a disadvantage relative to competition.
Furthermore, stable value products cannot be properly analyzed by just looking at a single data point such as crediting rate or a market-to-book ratio, as important as these two data points are.
Stable value products vary significantly in terms of basic design, portfolio holdings, contract details and discontinuance options. Fiduciary advisors must know all of these details so they can help their clients understand exactly what they are buying.
The good news is that new sources of detailed stable value information are now available to advisors, allowing them to quickly understand a specific product’s strengths and weaknesses to compare against others.
Matthew Gnabasik is a partner with independent fiduciary advice firm Cerity Partners.