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Stable value investing is playing an increasingly important
role in defined contribution (DC) plans such as 401(k)s. For
sponsors and participants, this conservative asset
class-offered through insurance company contracts-can deliver
steady returns without the volatility associated with stock and
"Stable value offers a unique combination of benefits,
including principal preservation, consistent positive returns,
and liquidity," says Gina Mitchell, president, Stable Value
Investment Association (SVIA). "As an asset, it offers higher
return potential than money market funds. It is also well
positioned to respond to rising interest rates and provide
Stable value is only available through employer-sponsored DC
plans and some 529 plans for educational expenses.
Approximately $705 billion is invested in stable value funds,
about 10.43% of $6.8 trillion held in DC plans, according to
"Stable value is a great portfolio diversifier," says Warren
Howe, national sales director for stable value, MetLife.
"Having a predictable return locked down without concerns about
negative returns, allows participants to take on a little more
risk elsewhere in their portfolios, such as increasing an
allocation to equities."
By amortizing gains and losses over the duration of the
portfolio, stable value is able to smooth market volatility,
says Mitchell, noting
there are three basic stable value structures:
Guaranteed Interest Contracts (GICs) and other general account
contracts, where assets are owned by the insurance company and
held in an insurer's general account.
Separate Account Contracts, where assets are owned by the
insurer but set aside in a separate account for the exclusive
benefit of the plan(s).
Synthetic GICs, where the assets are directly owned by the
Because stable value is designed specifically for, and is
available only through, DC plans, more retirees may opt to
maintain assets within the plan after retirement, says Howe.
"By doing so, they continue to receive the long-term benefits
of stable value, as well as the benefit of institutional
pricing for the investment options that the plan provides for
Within DC plans, stable value has historically been offered as
a stand-alone investment option. However Howe says that some
plan sponsors are now looking at custom target date funds that
include a stable value component, "We are also seeing a growing
number of state 529 plans include stable value as a core
component," he says. "Stable value is an ideal investment
option for parents investing for a child's higher
Fits between money market and bond
Mitchell says stable value as an asset class is well positioned
between money market and bond funds. "Stable value's returns
are generally 150 to 200 basis points higher than a money
market, and were 2.43 percent in 2014," she says. "It also
offers less volatility than a bond fund."
Howe says MetLife has seen the beginnings of a trend of plan
sponsors shifting from money market to stable value options.
With the upcoming implementation of money market reform by the
U.S. Securities and Exchange Commission (SEC) and recent plan
litigation that included money market exposure in a stable
value fund, such as Abbott v Lockheed Martin Corporation, plan
sponsors are re-evaluating their principal preservation option,
he says. "As of October 2016, money market reform for money
market funds other than government money market funds will
result in a floating net asset value (NAV) instead of the
standing dollar NAV structure. This combined with liquidity
gates and redemption fees could result in a loss in value. It
may also make it more difficult for plan participants to access
their balances in money market funds in times of stress."
Howe adds that moving to a government money market fund might
not be an attractive strategy under the changed market
conditions. "If every investor is chasing the same government
securities, those yields will likely go down, resulting in
extremely low returns for plan participants. In such a case,
stable value would have an even more significant return
advantage over money market funds."
By Richard Westlund