- Plan sponsors can benefit from understanding key differences in capital preservation investments
- Stable value funds have outperformed money market funds, and this may continue
- Defined contribution (DC) retirement accounts have $801 billion invested in stable value funds
Plan sponsors have a lot to think about when designing and maintaining a workplace retirement plan. Employee demographics, matching contributions, and selecting investment managers are just a few of the key factors.
One step of the decision-making process might seem less fraught — selecting a capital preservation option for the plan. This task may initially seem less difficult than choosing an investment in the target-date, equity, or fixed income categories. The objective of capital preservation might appear less complicated than a higher-return, higher-risk investment goal.
However, capital preservation strategies are not all alike, and we believe plan sponsors need to carefully evaluate the landscape of investment options, and the underlying risk/return that comes with them. We can highlight this by comparing the performance of two types of funds common in this category: money market and stable value funds.
A fresh look at stable value
Money market funds and stable value funds — common capital preservation choices for workplace plans — might seem unexciting from a performance perspective. Both types of funds seek to preserve principal, and their returns are typically lower than those of investments that take on greater risk.
However, there is a difference between the two categories in portfolio construction methodology. Stable value funds invest in intermediate- and short-term fixed income securities, and purchase insurance contracts to maintain book value protection for the underlying participant. Additionally, some stable value funds invest in guaranteed investment contracts (GICs), which are investment contracts issued by a highly rated insurance company that provide a specific interest rate and guarantee of principal. Money market funds invest in short-term, not intermediate-term securities, including repurchase agreements, certificates of deposit, commercial paper, and corporate and government notes, with maturities of less than 13 months.
These differences have allowed stable value as a category to outperform money market funds for many years with less volatility.
Stable value funds vs. money market funds, 1987-2019
Still well positioned
Nothing on the horizon appears likely to close that performance gap. The more diverse range of investments available to stable value funds may continue to give them an edge. In most periods, the ability to invest further out on the yield curve and across the investment-grade landscape, as stable value funds do, leads to better total return opportunities.
It is worth the effort for plan sponsors to consider whether a stable value fund would be an attractive investment option for their plan participants.
Stable value popular in 401(k) plans
Stable value funds can serve plan participants of many ages. They represent the type of investment that savers migrate toward as they build up higher balances and desire fewer ups and downs.
The Stable Value Investment Association notes that $801 billion was invested in stable value funds through defined contribution plans (as of December 31, 2018). In total, DC plans held $5.8 trillion in total retirement assets at the end of the second quarter of 2019, according to the Investment Company Institute. Combining these figures informally, stable value funds represented a little over 14% of DC plan assets. At the participant level, in 2016 the average 401(k) account allocated 6.1% to GICs and other stable value funds.
A range of choices
The stable value category includes a few different types of funds. Third-party stable value funds are typically structured as a collective investment trust (CIT) or as a segregated account for a specific plan or trust. Additionally, there are stable value products issued by insurance companies. These include products backed by the issuing insurance company’s general account assets or vehicles that are backed by a segregated asset account. There are no stable value mutual funds. It is important for plan sponsors to understand the differences between stable value offerings, including underlying expenses, and how they handle plan level withdrawals.
Putnam offers resources
Putnam is experienced as a stable value manager and offers educational resources that can be part of your efforts to learn more. For example, consult a brief primer on GICs and frequently asked questions about Putnam Stable Value Fund.