Investing October 16, 2024

Stable Value Funds Attract Attention in Rate-Cutting Environment

The slower response to interest-rate changes may benefit retirement plan investors, if the Fed continues to cut.

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After higher interest rates helped produce a strong run by money market funds, stable value funds are pushing back into the conversation as the Federal Reserve embarks on a rate-cutting regime.

According to an annual study by MetLife, 82% of defined contribution plan sponsors offer stable value funds as a capital preservation option, and that rate has held steady since 2022. Also, according to MetLife, 84% of plan sponsors who offer stable value funds—which are only available in tax-qualified retirement plans—say they heard about them from an adviser.

Stable value offerings utilize fixed-income investments paired with a stable value contract, or “wrap,” from an insurance company or other financial institution. 

Ken Waineo, senior director of institutional products at The Standard, says a key consideration when discussing stable value as an investment option is not so much the rise and fall of interest rates, but the “rate of change” at which those adjustments occur.

“It was the fact that rates climbed so quickly is how money markets outperformed” as people were able to capture the higher returns with them, he explains. “Looking historically, though, over the past 30 years, stable value generally outperforms money market funds.”

The Standard offers stable value funds with a guarantee from a general account group annuity contract. But studies comparing the funds do prove Waineo’s point. The key for plan advisers, Waineo says, is considering the goals of a plan sponsor looking for a capital preservation tool for participants.

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“Money markets turn over pretty quickly and respond to interest rates much quicker,” he says. “But as time goes on, stable value starts to catch up.”

Waineo equates money market funds to a speedboat, providing a fast response, and stable value funds as “more of a slow tanker,” which will take time to catch up.

“The nice thing about that is that if you have a declining-rate environment, it takes longer to float down, because you have these longer maturities,” he notes.

The slower pace may then be better for retirement savers with longer time horizons. That is partly why stable value funds were a popular default option before the Pension Protection Act of 2006 eventually ushered in the age of target-date funds as the most common qualified investment default alternative.

While generally not used as a QDIA today, stable value funds can be part of a default solution through vehicles such as a managed account or customized target-date allocation. Money market funds may have the “same goal in mind for the retirement plan” as stable value, but the longer-term nature of retirement savings makes the average three-to-five-year maturity of stable value more compelling, Waineo says.

If plan advisers are recommending stable value, they should consider what the product is and the ultimate needs of the plan. Waineo notes areas to study include the underlying investments in the fund, the credit rating of the insurer backing and the fees associated with it.

“If your sole goal is liquidity, then a money market may make better sense for a client,” he says.

Waineo maintains that, no matter the final decision an adviser makes, it can be useful to be up to date on stable value.

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