March 2022 / FIXED INCOME
Five Reasons to Consider Stable Value in a Plan Lineup
Asset class has performed well in multiple rate environments.
Plan sponsors and investment professionals have asked us about the virtues of including stable value in retirement plans. Here, we discuss five important reasons to consider their inclusion—especially considering recent market volatility and looking ahead to the rate‑hiking cycle from the Federal Reserve.
1. Higher Crediting Rates
Perhaps the most compelling reason for including stable value is that the asset class has historically generated a higher yield and superior performance to money market funds in various interest rate environments, while also offering similar benefits for investors seeking principal preservation and daily liquidity. In the chart above, we compare stable value crediting rates to money market fund yields and highlight the yield advantage stable value crediting rates have held over money market fund yields for the indicated period.
Stable Value Has Maintained Competitive Yields
(Fig. 1) Annualized yields: Money markets vs. stable value
While there are brief periods of time, usually at the tail end of rate‑hiking cycles, when money market funds eclipsed yields generated by stable value, historically, stable value yields have held up well relative to money markets through various rate cycles. Over time, this yield advantage can be beneficial for stable value investors and can help drive better participant investment outcomes, in our view.
Since the start of the pandemic in early 2020 through December 31, 2021, stable value crediting rates were at the higher end of that historical range and offered a more‑than 150‑basis‑point yield advantage over money market funds.
2. Daily Liquidity
In addition to potentially higher yields over money market yields, stable value also can, in our view, provide participants with similar features that money funds offer, including a stable net asset value (NAV) and daily liquidity. As with money market funds, stable value investment options permit participants to deposit and withdraw, or transfer funds on a daily basis, typically at a stable $1.00 per share. In periods of market stress, notably during the 2008 global financial crisis and the coronavirus pandemic, daily liquidity and principal preservation can be especially important for plan sponsors and participants.
3. Attractive Risk/Return Profile
Not only has stable value outperformed money market funds and comparable low‑duration strategies over the past 10 years ending December 31, 2021, but it has also outperformed these strategies and inflation with a lower volatility and a better risk/return profile (Fig. 2).
Stable Value Has Looked Favorable Over the Last 10 Years
(Fig. 2) Risk/return characteristics
Stable Value Was Attractive Through Multiple Market Types
(Fig. 3) Historical rate tightening cycle yield curve change
4. Building Block Option
Given stable value’s unique risk/return profile, we believe that stable value portfolios can offer participants a well‑diversified, stable NAV investment option to help round out their retirement portfolios. Plan sponsors and investment professionals may be drawn to the potential benefits of a flexible, well‑diversified, and uncorrelated investment option that can be used in other capacities in an investment lineup. Various implementations for a stable value portfolio can include:
- A building block in custom target date funds,
- Managed accounts,
- Retirement income investment offerings, and
- The default option for a self‑directed brokerage account.
5. A Multi‑Use Investment Strategy
Perhaps the most important reason to consider including stable value in an investment lineup is that it has demonstrated long‑term success in providing liquidity and principal preservation across myriad market conditions. Stable value performed well relative to money market funds and comparable low‑duration strategies in various rate environments.
Stable value has come a long way since its inception in the mid‑1970s. Today, with assets approaching USD 1 trillion,1 stable value is a mainstay in the retirement industry, especially for participants approaching retirement and those in retirement.
With enhanced features and potential advantages over money market funds and low‑duration strategies, we believe stable value should be considered as a standalone investment option in every plan and also as an option in other retirement.
As the Fed begins to taper bond purchases ahead of expected rate hikes, we believe stable value could once again perform well relative to money market funds and could be an attractive alternative to money market funds.
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