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Outlook and Trends in Defined Contribution Plans

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Stocks have been racing higher since 2009, attracting investor attention at the very time that low interest rates have been depressing fixed-income returns. Meanwhile, target-date funds have been attracting an ever-growing share of the money being saved in defined contribution plans, including money that once flowed into stable value funds. But a survey by asset manager PIMCO of the nation’s leading DC-plan advisors suggests the outlook for stable value may be bright nonetheless.

To be sure, the industry faces challenges, said Stacy Schaus, executive vice president and head of defined contribution practice for PIMCO. Participant contributions to DC plans could continue to flow more rapidly into other investment options, she observed, particularly if plan sponsors become more aggressive about reenrolling employees into their plans and directing them into their default investment options. Consultants broadly support reenrollment, although relatively few plan sponsors have embraced it so far.

Stable value also could be threatened if Baby Boomers continue the current trend of rolling their DC-plan assets into Individual Retirement Accounts when they retire, since stable value funds are not available in IRAs. But, Schaus said, there are reasons to believe that plan sponsors and providers will find ways to make DC plans so attractive that participants won’t want to leave them for IRAs.

PIMCO has surveyed retirement plan consultants annually for the past eight years. Its 2014 poll garnered responses from 49 leading consulting firms serving more than 7,800 clients—clients whose DC-plan assets totaled $2.8 trillion, or about half the DC marketplace. The survey found strong support among consultants for stable value funds. For example, every one of them said the core investment offerings in a DC plan should include a capital preservation option, which historically has meant either a stable value or money market fund. In addition, more than 70 percent said they were at least somewhat likely to recommend that clients replace their money market fund with a stable value fund if federal regulators follow through with their proposal to have net asset values for money market funds fluctuate with market values. All this, Schaus said, suggests the stable value industry has an opportunity to retain its place on the menu of core investment options in DC plans.

Nonetheless, she said, the stable value industry must find a way to have its products incorporated more broadly into target-date funds and other asset-allocation investment options, including managed accounts that have become the most popular default investment options in DC plans. Many managed account programs, as well as custom target-date funds created by larger plans, already utilize stable value funds, but off-the-shelf target-date funds generally do not.

“How well the industry weaves stable value into default (investment options) will largely determine where the future of stable value may go,” Schaus said.

Here, too, the survey results were encouraging, with 39 percent of consultants actively promoting custom target-date strategies to their clients and another 43 percent supportive of client interest in the idea. (Figures for managed accounts weren’t quite as strong. Still, 37 percent of consultants said they actively promote managed accounts or support client interest in them.)

Consultants like stable value in target-date funds in part because it can reduce the potential for losses without compromising returns—an especially important concern when participants are at or near retirement age. Consultants on average say participants should not be exposed to more than a 10 percent loss in their retirement account at age 65, Schaus said. Yet PIMCO looked at the 40 largest target-date funds aimed at 65-year-olds and calculated the actual value at risk over a 12-month time horizon was closer to 20 percent. By contrast, a comparable fund that included an allocation to stable value put only about 10 percent of the participant’s account value at risk.

Beyond expanding into target-date funds, Schaus said the stable value industry can help to solidify its future by convincing plan sponsors to educate plan participants to keep their money in their DC plans after retirement. Right now, she said, only a small minority of sponsors actively seek to retain those assets.

For retirees who do stay in their employers’ retirement plans, Schaus said, the most important post-retirement need relating to that plan will be retirement income modeling and education, including one-on-one retirement counseling. The stable value industry can play a role in that, she said, by ensuring that the people and organizations creating retirement income models understand stable value and account for it properly in their models.