Stable Value’s Role in a Diversified DC Plan Menu

Earlier this week, John Hancock Retirement Plan Services revealed its newest stable value product, the Stable Value Guaranteed Income Fund.

While discussing the launch of the new fund, Patrick Murphy, CEO of John Hancock Retirement, also spoke generally about the importance of the stable value asset class—and not just for retirees and near-retirees.

Stable value is a valuable option for the conservative portion of anyone’s portfolio, Murphy says. For retirees and near retirees, its guarantee of principal and interest provides principal preservation and a predictable income stream that they can rely on during their retirement years. For individuals who are uncomfortable with market volatility and those seeking to diversify their investments across a range of asset classes, stable value’s protection of principal and interest provides steady and stable returns, protecting these assets from loss in the event of a market downturn.

Murphy says it makes some sense why stable value investments are discussed less often by retirement plan fiduciaries than, say, target-date funds or managed accounts—despite the fact that stable value remains the largest conservative defined contribution (DC) plan asset class.

“Unlike TDFs, stable value funds generally do not qualify as a qualified default investment alternative [QDIA] as defined by the Employee Retirement Income Security Act [ERISA],” Murphy says, noting that there are limited exceptions for stable value assets that were invested prior to the Pension Protection Act. “Automatic investment into a plan’s QDIA selection is an important fiduciary decision and target-date funds, with age-based diversified portfolios designed to meet the retirement needs of participants who are at very different distances from retirement, are naturally the subject of much analysis.”

Still, as Murphy explains, stable value funds can and do play an important role as an asset class along with target-date funds, and they should also be the subject of sufficient deliberation. This is a sentiment echoed by Robert Lawton, president, Lawton Retirement Plan Consultants.

“Almost all 401(k) plans do a good job of covering the nine basic U.S. equity style boxes of value, blend and growth in the standard capitalization sizes of large, mid and small,” Lawton says. “However, does your plan offer an international bond fund? How about a real estate or commodities fund? In many plans, the real estate fund has been the best performing option recently and may be again this year. As the current economic cycle progresses, possibly into recession, and the bull market in U.S. equities comes to an end, do you have the right investment options available to allow your participants to continue to be successful investors?”

Lawton says a 401(k) investment fund lineup should offer “a high quality, extremely low risk option for those participants who are close to retirement, scared of volatile markets or conservative investors.” Stable value funds have been the highest yielding, lowest risk options available lately, he adds.

“If the Fed continues to cut interest rates, they will likely prove to be superior in comparison with money market funds,” Lawton says. “Be aware that employers have faced litigation for offering money market funds instead of stable value funds. Many advisers feel that the safe option is the most important investment option in 401(k) plans. Make sure your plan offers the best safe option possible.”

Murphy adds that stable value funds, with their guarantee of principal and guaranteed payment of predictable income, can be a valuable part of a plan’s “retirement tier” and a participant’s decumulation strategy. 

“As more plan sponsors focus on keeping terminated and retired participants in plan, offering investment options that meet retirees’ spending needs and principal preservation objectives has become increasingly important,” Murphy says.