The validity of stable-value products within a retirement plan has been both espoused and denounced for the better half of the last decade.
The exclusion of these products as a qualified default investment alternative in the Pension Protection Act of 2006 was the supposed death knell for principal preservation. But principal preservation products such as stable value are alive and well, and advisers and sponsors should take notice.
The reality is that half of retirement plan participants have at least some exposure to a stable-value investment, and one in five retirement dollars is in stable-value investments, according to a recent analysis of New York Life Retirement Plan Services' retirement plan platform.
This is especially significant, given the fact that new “auto-enrolled” participants are not automatically defaulted into stable-value investments. That means that participants are actively choosing to direct a portion of their retirement account into these investments, which protect principal and offer a guaranteed rate of return. It is the ultimate conservative option for do-it-yourself participants.
And this isn't a new phenomenon. Plan assets in stable-value investments have held fairly steady at 20% since the financial crisis of 2008. Yet in the eyes of sponsors and advisers, stable-value investments often have received a cursory review in a plan's investment lineup, with the record keeper's proprietary offering the default choice.
But this is rapidly evolving.
Advisers and sponsors are adjusting how they select and monitor the principal preservation asset class.
OPEN ARCHITECTURE
First and foremost, savvy advisors are insisting upon an open-architecture philosophy from record keepers for principal preservation products. The subsequent selection process for inclusion within a plan's lineup is increasingly rigorous.
A principal preservation product within a 401(k) plan is really a foregone conclusion, but not all principal preservation products are traditional stable-value investments.
Money market funds are also common investments within 401(k) plans. But this practice is increasingly coming under scrutiny, as extremely low interest rates for the foreseeable future mean participants invested in a money market fund cannot even keep place with the rate of inflation.
Additionally, proposed regulation may force an evolution of the money market industry. Sponsors with a participant base with a high exposure to money market funds should re-examine their suitability, especially as traditional stable-value investments have gained significant traction in being the dominant principal preservation product.PROVIDER CHALLENGES
Additionally, the stable-value community itself is currently in transition. After the financial market collapse, many firms reassessed what they considered to be core businesses, and for many, stable-value investments were considered ancillary.
So in turn, we have seen many large providers close or liquidate their stable-value investments in the last five years, creating capacity constraints in short-term wraps.
Low interest rates have also hampered stable-value providers' investment strategies, making some providers unwilling to accept large influxes of cash from new clients. Advisers should be aggressively and continually monitoring the stable-value landscape to ensure that their sponsors are partnering with providers that are committed to the stable-value marketplace.WHAT'S NEXT?
Given the uncertainty and volatility that dominates today's financial markets, it is a safe assumption that participants will remain cautious, and stable-value will continue to be a vital asset class. It is also reasonable to expect we will continue to see the exodus of some stable-value providers.
With one in five retirement dollars in stable value, advisers need to seek out expertise in evaluating this asset class and, in turn, educate sponsors on their fiduciary responsibilities in offering suitable investment solutions.
Steven Dorval is managing director of retirement and investment strategy at New York Life Retirement Plan Services.
