Stable value funds are a mainstay of most retirement plans. Advisers and plan sponsors like to include them in their investment menus because they provide better returns (between 1% and 3% over the past several years) than money market funds, but are almost as secure.
The underlying portfolio within a stable value fund is a short- to intermediate-term bond portfolio that generally provides a term premium over a money market fund, and the use of insurance wrappers to create a stable net asset value (NAV) makes these vehicles attractive for plan participants.
Recently, four stable value funds (Galliard, JPMorgan, New York Life and Putnam) provided an update on the state of the market. Here’s a summary of the views of their managers:
1. Money market reform
Money market mutual funds have been popular options for DC plans. However, near zero short-term interest rates and recent SEC money market reforms have plan sponsors and their advisers rethinking their role.
In 2015, the SEC released new requirements for money market funds. Only retail funds that are classified as government funds will be able to maintain a stable NAV and remain exempt from liquidation restrictions. Non-government retail money market funds will also be able to maintain a stable NAV, but they may be subject to liquidation restrictions. Institutional money markets, on the other hand, will now have a floating NAV as well as being subject to liquidation restrictions.
2. Improved wrap capacity
Wrap capacity for stable value funds continued to improve in 2015. Stable value asset growth has been flat to down, so demand for insurance wrappers has dropped. At the same time, wrap providers have sought to grow their businesses. Wrap providers that had previously demanded management control over a portion of a stable value portfolio as a condition of providing wrap insurance, are now willing to forgo it.
With more wrap coverage available, the expectation is that wrap fees will decline up to 0.05% from their current level of approximately 0.25%. But the managers interviewed think it unlikely that they will drop to the pre-2008 level of around 0.15%.
3. Interest rates
The largest challenge stable value fund managers face is the possibility that interest rates will rise. The concern is that in a rising rate environment, market-to-book ratios could dip below par. While stable value products are designed to withstand such drops, the ability of managers to navigate a rising interest rate environment will depend on how quickly and how much rates rise. Small and gradual increases are manageable; sharp moves upward could drop market values below book values quickly. If market-to-book ratios fall below par, it will be more challenging for plan sponsors to execute large scale plan events, including re-enrollments.
4. Target date funds
Many stable value managers view target date funds as a potential growth engine and hope that stable value offerings will be included within a TDF. But logistical and legislative hurdles pose barriers for including stable value in off-the-shelf TDFs, and many TDF managers believe that the cost of using stable value in TDFs outweigh the benefits.
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