Resetting expectations: Why stable value makes sense in today’s dynamic markets

The debate between stable value portfolios and money market funds has reignited, as defined contribution (DC) consultants expect increased plan sponsor interest in reviewing/revisiting their plans’ capital preservation investment options.¹ This is largely driven by today’s interest rate environment, in which money market fund yields have outpaced stable value crediting rates over the past three years—a dynamic rarely seen over the past three decades.² As the interest rate cycle enters a more uncertain phase, we believe now is the time for plan sponsors to consider stable value and its place as a long‑term capital preservation strategy in a plan lineup.

How money market funds and stable value tend to respond to rates changing

With increased uncertainty over the path of interest rates going forward, plan sponsors should reexamine the trade‑offs between capital preservation options. Money market funds and stable value strategies both play important roles in DC plan lineups, and many plans offer both options to participants. However, the two have historically behaved differently throughout changes in the interest rate cycle.

The key difference is how fast yields respond to changes in interest rates. Historically, when rates rose, money market funds benefited because their yields can increase in a short period of time. They tend to respond almost immediately to changes in the federal funds rate because they must invest in very short‑term securities that mature and reset frequently.

That same dynamic can be a detriment for money markets in a falling rate or low rate environment as money market yields reprice lower. Stable value typically reacts more slowly because portfolios are longer duration, and wrap contracts are intended to help reduce day‑to‑day volatility and smooth changes in the interest rate investors earn. Crediting‑rate resets are heavily influenced by portfolio yields, market‑to‑book relationships, and participant cash flows.

This difference in reset speed can materially affect the participant experience in a falling‑rate environment. The recent hiking cycle has reinforced a behavioral lesson. In rapid hiking regimes, credited rates may lag rates for very short‑term securities, and plan participant flows can follow yields and performance. Clear communication can help retirement plan participants avoid reacting too quickly to short‑term changes. With the benefits of its slower crediting rate resets and emphasis on providing a smoother experience through volatility, stable value as an asset class has outperformed money market funds on average over the past 20 years through changing rate regimes and market environments (Figure 1).

Looking back: Evaluating stable value’s resilience through periods of distress

To understand stable value’s function and viability moving forward, we examine the three most recent stressed market periods, including the Fed’s intense monetary policy shift in 2022.

• 2008 global financial crisis (GFC): During the GFC, credit markets seized and money market funds that invested in corporate debt were pressured by large withdrawals and liquidity challenges. In stable value, market values fell relative to book value, and wrap providers exited the stable value business or tightened terms. The key lesson for stable value: Risk is not only portfolio quality but also wrap provider strength and contract clarity under stress.
• 2020 COVID: In this period, the challenge was liquidity timing. Rapid reallocations into capital preservation increased the need for operational liquidity and wrap capacity. Wrap providers became more selective, and plan sponsors leaned heavily on operational readiness to meet participant activity.
• 2022–2023 Fed hiking cycle: This period paired a sharp rise in rates with investors notably moving money out of stable value—crediting rates reset gradually while money market yields jumped quickly. At the same time, DC plans saw outflows tied to retirements, lump sum payments, and reallocations to higher‑returning assets. That combination amplified market‑to‑book deficits, negatively impacted crediting rates, and increased the importance of liquidity management and contract clarity.

These periods highlight the key features that enabled stable value managers to navigate challenging environments, including diversification across wrap providers, clear contract terms supported by strong manager‑wrap provider relationships, and a disciplined focus on operational readiness and risk management. Taken together, these episodes reinforce a broader point: Stable value is designed to support the core goals of smoothing volatility, liquidity, and principal preservation through diverse markets.

Stable value has historically delivered stronger cumulative growth than money markets (Figure 2). Over the last three decades, the Morningstar US CIT Stable Value Index grew more over time than the Lipper Money Market Index, reflecting stable value’s intentions to provide liquidity and principal preservation along with more attractive income potential through various rate regimes.

Money market funds are a familiar option in many retirement accounts offering daily liquidity, straightforward messaging, and yields that generally follow short‑term policy rates. For participants who want a cash‑like option that responds rapidly to policy changes, these features can be appropriate and easy to explain.

Stable value aims to provide principal stability, daily participant liquidity, and a smoother crediting rate, typically supported by wrap contracts that help participants make qualified withdrawals at principal value. It is designed to provide a more consistent return experience over time while preserving capital, making it a long-term capital preservation option for many defined contribution plans.

Although performance between stable value and money market funds may vary at different points in the interest rate cycle, plan sponsors should evaluate these options based on their long-term objectives and the role each plays within a retirement plan.

Practical comparison: What plan sponsors can evaluate and ask their providers

Considering money market versus stable value can be most productive when considering a plan’s objectives and participant behavior.

What problem is the plan solving?

• Access to immediate liquidity: If the primary goal is immediate liquidity and a cash‑like option that reflects current short‑term rates, a money market fund may be the more appropriate fit. Participants can access daily liquidity in both money markets and stable value, but most stable value funds subject participants to a waiting period if transferring assets from a stable value fund to a competing investment option like a money market fund. Large, plan‑initiated withdrawals in stable value are also usually subject to a put provision.
• Capital preservation over a longer time horizon: If the goal is principal stability, then an investment with a steadier crediting rate and return profile (stable value) may be the more appropriate fit—particularly when short rates are declining. Over long time periods, the stable value index has historically delivered stronger cumulative growth than a money market index, reflecting diversified portfolio construction and crediting‑rate smoothing.

How important is yield considering the differences in reset speeds?

• Money market yields can move higher and lower quickly as they are influenced by Fed policy rates, which can potentially erode income when interest rates are reduced.
• Stable value crediting rates reset at a gradual pace, while book value accounting and the use of investment contracts can help smooth volatility and support more durable income. As a unique option for qualified retirement plans, participant communications can help explain the pros and cons of different low duration options.

How does the option fit within the broader DC plan lineup

• A money market option often functions as a liquidity sleeve.
• Stable value is commonly positioned as the plan’s primary capital preservation option.
• Stable value can be incorporated into other investment options in a plan lineup, i.e., as a component of target date funds, retirement income funds, and managed accounts.

Conclusion

Uncertainty around interest rates reinforces the importance of looking beyond headline yields. Plan sponsors should not only consider how each option may respond as market conditions change, but also how well it supports participants long-term retirement outcomes.

For plan sponsors, consultants, and advisors, the most useful framing is objective‑based: If the plan prioritizes cash‑like liquidity and rapid alignment with short‑term rates, money market may be appropriate. If the plan prioritizes principal stability with a smoother crediting rate return path as yields reset, stable value often becomes the more attractive default capital preservation option that supports long‑term retirement outcomes.