Stability and guarantees make them an essential component of a diversified 401(k) portfolio
by Kent BartellMr. Bartell is the director of investment research at The Standard. He has more than 25 years of experience in portfolio management and financial services. Visit www.standard.com
We all know that a balanced investment portfolio includes equities, bonds and cash equivalents. However, stable value funds, a good alternative to cash equivalents, are often overlooked. With advantages for a plan participant’s overall investment choices and contributions to their income generation strategy, stable value funds boast both long-term stability and guaranteed returns, which in return, permit successful asset allocation.
As an advisor, your expertise in investment options, such as stable value funds, is important for clients, especially when selecting cash equivalent options like money market funds. While stable value funds provide unique benefits to meet many investors’ needs, The Standard’s 2021 Retirement Research shows that almost 40% of employees are still unfamiliar with them. The opportunity to inform clients on the benefits of investment options such as stable value funds is essential to the service you provide your clients.
Here’s why you should take a close look at the benefits stable value funds offer for a diversified investment portfolio.
Differentiation Between Stable Value Funds and Money Market Funds
While money market funds and stable value funds both offer stability and liquidity for retirement plans, money market funds generally do not provide a guaranteed rate of return. In a low-interest rate environment, the interest on money market funds can drop to zero. In contrast, fixed-rate stable value funds often offer a minimum guaranteed rate of return, even if money market rates do drop to zero.
Stable value funds focus on capital preservation and liquidity to provide steady, positive returns for participants. Even during periods of market volatility, plan participants will receive book value — principal and accrued interest — for their investments. In addition, stable value funds may hold higher yielding investments like mortgaged-backed securities and short-term bonds. According to The Standard’s 2021 Retirement Research, 54% of retirement plan participants aged 55 through 65 would select stable value funds over money market funds due to their historical returns. For instance, during the market downturn of 2008 and the current COVID-19 impacted market, stable value funds were one of the few investment options to produce a positive return.
Not only do stable value funds historically have higher returns than money market funds, one of their top benefits is their ability to smooth out volatility. During a time of changing interest rates, capital preservation funds like stable value funds can withstand market changes better than their counterpart, money market funds. Money market funds invest in very short-duration investments, so changes in interest rates, positive or negative, immediately impact their yield. In contrast, stable value funds typically invest in slightly longer-maturity fixed-income products. These longer-maturity investments generally provide higher returns as well as a longer period of time for an underlying change in interest rates to flow throw to their yields.
Illustrating the performance data of both investment options can help build confidence in clients, especially those concerned with market volatility and those who desire less risky investment options. According to The Standard’s 2021 Retirement Research, while 61% of employees would prefer growth over security, 51% would prefer guaranteed interest rates with protection for their investments in comparison to the 39% who would prefer higher returns with higher risk. Additionally, when employees are informed they can have some of both, with the selection of investment options such as stable value funds, many investors find that appealing. As an advisor, informing both plan sponsors and participants on the benefits that stable value funds offer, from long-term stability to predictable returns, can build credibility and demonstrate value.
Benefits for Portfolio Diversification
For many employees closer to retirement age, protection against market volatility is crucial, as they lack the time needed to bounce back from the market’s historical ebbs and flows. For eligible plans, stable value funds are a key component of a balanced portfolio. Stable value funds are built on a well-diversified portfolio of high-quality, fixed-income instruments which can be appealing to those risk-averse, or soon-to-be retiring, plan participants. The principal guarantee built into stable value funds offers crucial protection for those participants. Bringing ease of mind to near-retirees is a defining feature of this investment choice.
Not only are stable value funds an ideal investment match for near-retirees, they are a fundamental investment base for the majority of eligible employer-sponsored retirement plan portfolios. By having stable value funds as part of an investment mix, a portfolio can be balanced with more aggressive investment options, due to the guaranteed returns stable value funds provide. If a portfolio is too aggressively invested, it can be difficult for a client to remain confident during market downturns.
Don’t Overlook Stable Value Funds
As an advisor, recommending an investment option such as a stable value fund can result in more confident plan participants, reassured that a portion of their money remains stable despite the current state of the market. A stable value fund is generally issued by an insurance company. The amounts contributed and the fulfillment of any guarantees specified in the insurance contract are insurance claims, supported by the full faith and credit of the insurance company that issued the contract. It is not insured by the FDIC or any other federal governmental agency. In addition, it’s possible for the crediting rate to reset from time to time in accordance with the terms of the insurance contract, with early withdrawals potentially subject to fees and penalties in accordance with the terms of contract. However, in comparison to higher-risk asset options, stable value funds offer both income generation and stability.
Regardless of risk tolerance, stable value funds can be a good investment choice for any eligible portfolio, allowing for additional equity exposure. Do you have clients or plan sponsors with plan participants who would benefit from a lower-risk investment in their portfolio? Don’t overlook the benefits stable value funds offer.
1 The Standard’s 2021 Retirement Research
3 The Standard’s 2021 Retirement Research
5 The Standard’s 2021 Retirement Research