By Randy Myers
It was an ill-fated moment for the stable value industry.
In 2007, the U.S. Department of Labor issued regulations dictating which types of investments would qualify as appropriate default investment options in defined contribution retirement savings plans. The DOL left stable value funds—then one of the most popular investments in retirement plans—off the list, concerned that plan participants would need exposure to stocks to meet their long-term retirement savings goals. Instead, the DOL designated target-date funds, which typically hold a mix of stocks, bonds, and sometimes cash, as Qualified Default Investment Alternatives (QDIAs).
QDIAs would provide a fiduciary safe harbor to plan sponsors who made them the default investment option for any plan participant automatically enrolled into their plan. At a practical level, this meant sponsors who chose target-date funds as their default investment option wouldn’t have to worry about being sued by participants who felt they were inappropriate.
Since that ruling, target-date funds have captured the lion’s share of the money flowing into defined contribution plans. Speaking at the 2024 SVIA Spring Seminar in April, Angela Montez, senior vice president and chief legal, corporate, and government affairs officer for MissionSquare Retirement, said target-date funds now account [RM1] for about 40%, or more than $3 trillion, of assets in defined contribution plans, up from 5% or $186 billion in 2008 when the QDIA regulations went into effect. In addition, roughly 90% of defined contribution plans now use target-date funds as the default investment option for automatically enrolled plan participants[RM2] .1
Figures in this paragraph have been updated to reflect new data available since the 2024 Spring Seminar.
By comparison, stable value assets have grown from about $400 million to approximately a trillion dollars over that same period—a sizeable gain that nonetheless pales in comparison to the target-date experience.
Still, Montez said, stable value continues to play an important role in the retirement savings industry, with approximately 80% of defined contribution plans including it in their investment lineups. Stable value is particularly prominent in the government plan market, she said, with most plans in that space offering the asset class as an investment option. (MissionSquare manages and administers retirement plans for public sector employers and employees.)
Today, Montez and other members of the stable value community see continued growth opportunities for stable value even though they don’t anticipate the DOL revising its QDIA definitions anytime soon.
“The (final) story is yet to be written for stable value,” said Keith Mancini, vice president, government affairs, for financial services firm Empower, a financial services firm and recordkeeper for retirement plans. Mancini joined Montez in addressing the Spring Seminar, as did Aliya Robinson, managing legal counsel, legislative and regulatory affairs, for asset management company T. Rowe Price.
The value proposition for stable value is alive and well, Mancini said, and the product itself is working its way into other structures, including custom target-date funds structured as collective investment trusts (CITs), providing a future source of growth.[RM3]
Robinson added that retirement plans and their participants are increasingly focused on how to spend down the assets participants have saved in defined contribution plans, and that retirees looking to guard against market volatility could view stable value as a useful tool in this endeavor.
Mancini concurred, adding that for insurers, group annuity contracts could serve as the underlying chassis for products used both to accumulate assets while plan participants are working and then later convert those assets into retirement income through annuitization. His own firm recently entered into a partnership in which its stable value fund is used in a target-date fund series structured as CITs but also is paired with a fixed annuity from another provider.
Montez also noted a growing interest in developing a new generation of QDIAs that could provide a more personalized and adaptive approach to the unique needs of individual plan participants.
“This has created more demand for hybrid or dynamic approaches as recordkeeping technology has evolved,” Montez said.
In addition to directly incorporating stable value into target-date funds, Montez continued, some providers are developing hybrid, age-based approaches to target-date funds that start participants in those funds and then automatically move them into other vehicles when they reach a certain age. Unlike traditional target-date funds, some of these newer options allow plan sponsors to choose where the assets are directed.
“This … could be an opportunity to add stable value into the mix,” Montez said. She called stable value an attractive option for plan sponsors because “it’s a very good volatility management tool and (its) lower cost structure could help recordkeepers provide more beneficial fee structures to sponsors.”
Mancini said stable value providers also could look to grow by tapping into the new market for emergency savings accounts in the wake of SECURE 2.0 Act of 2022, which included provisions for allowing plan sponsors to offer emergency savings accounts to employees.
In the meantime, Robinson noted, there is still hope that Congress will take action to allow the use of CITs in 403(b) retirement savings plans, which are offered by public school systems and certain other tax-exempt organizations. The exclusion of CITs has severely limited the use of stable value in 403(b) plans. SECURE 2.0 amended tax laws to allow their use but did not address federal securities laws which continue to prohibit it.
“There continues to be an effort to get those securities provisions passed,” Robinson said, noting that the enabling language was included in a larger financial services bill recently passed by the House of Representatives. However, while the 403(b) amendment enjoyed bipartisan support, the larger bill passed on a partisan basis, making its path forward uncertain.
Nonetheless, Montez said supporters of the legislation are “somewhat optimistic” that some form of banking package will move by the end of the year that would address the CIT issue for 403(b) plans. She noted that a number of members of Congress are retiring and want to make sure they finalize pieces of retirement legislation that are part of their legacy. They include Rep. Patrick McHenry (R-N.C.), who chairs the House Financial Services Committee and, Montez said, supports the provision on 403(b) plans.
If legislation does pass, she said, it could open stable value up to a market that’s more than a trillion dollars in size, and where stable value is the only asset class not prominently represented.
Mancini also noted that the securities law changes in this legislation would not only allow CITs in most 403(b) plans, but would allow insurance companies to offer those plans the same stable value products currently offered to 401(k) and governmental 457(b) plans.
Finally, Montez noted that a March 2024 report from the General Accounting Office suggested the Department of Labor update its existing guidance on target-date funds. The recommendation was spurred in part by a GAO finding that investment performance has varied more among target-date funds closer to their target date than it has among funds further from their target date.
The GAO said new guidance should provide information about recent target-date fund developments, including the use of CITs as well as differences between fund glide paths that go “to” retirement and those that go “through” retirement. (Glide paths that go to retirement stop changing once the target retirement date is reached; those that go through retirement continue to change past the target date.)
Montez said new guidance could provide opportunities for stable value by focusing attention on how the asset class could help preserve assets in target-date funds near their target date.
Looking further ahead, Montez said the stable value industry may want to start laying the groundwork to expand into the Health Savings Account market. However, she and Mancini agreed the industry would have to clear numerous hurdles to make that happen. High among them is that like 403(b) plans, HSA plans currently cannot offer CITs as an investment option and there is no legislative effort on the horizon that would change that.
