By Randy Myers
After watching stable value funds navigate two years of negative cash flows, recordkeepers have a fairly good understanding of what retirement plan participants are doing with their money—and some ideas about why they’re doing it.
In the 401(k) market, participants are making fewer exchanges into stable value from other investment options.
In the 457 plan market, which serves the government and nonprofit sectors, about half the outflows are attributable to older participants leaving their plans entirely.
Both developments appear to be tied at least in part to the sharp uptick in short-term interest rates from March 2022 through July 2023, which led to an inverted yield curve and drove money market returns above stable value crediting rates. A strong performance by the stock market in 2023 and 2024 also may have contributed to less cash flowing into stable value.
These were the high-level messages shared at the Stable Value Investment Association’s 2024 Fall Forum by Michael Katona, stable value portfolio manager at Vanguard, and Callen Oster, senior actuary and retirement solutions pricing lead at Nationwide Financial. Katona and Oster were joined in their presentation by Behzad Alimoradian, risk management specialist at Valerian Capital Group, and Greg Ungerman, senior vice president and defined contribution practice leader at Callan.
Katona kicked off the panel presentation by noting that 2022 was the last year Vanguard saw positive net cash flows for stable value in its 401(k) recordkeeping business. The good news, he said, is that Vanguard has not seen a material increase in withdrawals from stable value funds since that time, nor any sizeable decline in new contributions to stable value. Rather, it was a precipitous drop in exchanges into stable value from other asset classes that largely accounted for stable value’s net negative cash flows.
While Katona and his team didn’t have access to the behaviors of individual plan participants, they did look at plan-level data to see if they could determine where exchanges were going other than into stable value funds. They didn’t find much evidence of plan participants trying to arbitrage interest rates by moving into money market funds or brokerage account options. What they did find was a sizeable increase in net cash flows into fixed-income investments in 2023 versus 2022. Katona speculated that this increase may have been driven by the fact that most bond funds were boasting yields that exceeded stable value crediting rates.
Oster said an analysis of Nationwide’s full-service recordkeeping operations, in which 457 plans make up the majority of the business, showed that over the past couple of years about 10% of the assets in its general account stable value product have been flowing out of that product annually. About half of those outflows were leaving defined contribution plans entirely rather than being exchanged into another investment option. Of the money leaving plans, he said, 87% was withdrawn by plan participants over the age of 59½, which is the age at which most participants can begin to make withdrawals without a 10% tax penalty. About 85% of the withdrawals were made by participants no longer employed by their plan sponsor.
Most of the withdrawals from stable value were part of a complete withdrawal of all the assets in a participant’s account balance, Oster said, and those withdrawals tended to be made by participants with larger account balances. The most common rollover destinations were brokerage firms. Anecdotal evidence, Oster said, suggested that at least some of that money was being rolled into brokerage accounts to gain access to money market funds.
Alimoradian said Valerian performs a study of stable value cash flows annually by looking at plan-level data covering about 80% of the market for synthetic guaranteed investment contracts, a popular type of stable value fund. The data show that these funds historically have sustained themselves through positive net transfers, or exchanges, from other investment options. Plan participants invest in some other investment option early in their careers, he said, then transfer some of their money into stable value as they age and, finally, withdraw those assets in retirement.
Valerian said net transfers into stable value turned negative beginning in the third quarter of 2022. In some retirement plans, he added, stable value is one of the few retirement plan investment options that have experienced declining levels of return adjusted assets.
Alimoradian, speaking in reference to the individually managed plans he studied, noted that while the aggregate stable value distributions exceeded contributions by about 6% annually from 2008 to 2018, that figure has stood at about 10% since the fourth quarter of 2022.
In analyzing potential drivers for these trends, Alimoradian concluded that stable value cash flows show some correlation to equity market performance, with cash surging into stable value during periods of crisis (e.g., during the Covid pandemic) and then slowing post-crisis. So, he said, it isn’t surprising to have seen increased outflows from stable value over the past two years as economic fallout from the Covid pandemic has receded.
Alimoradian also suggested that low stable value crediting rates have helped drive outflows from the asset class recently. Over the past couple of years, crediting rates have averaged a little less than 3% while money market rates have been in the 5% range and the stock market has been on a tear.
Until market dynamics change, then, net stable value cash flows may remain negative.
“As long as money market and equity returns persistently exceed crediting rates, we don’t expect net exchanges back into stable value,” Katona said.
The question, of course, is when crediting rates might start to look better relative to money market yields. It’s impossible to know for certain, of course, but Katona noted that the bond market is pricing in lower U.S. Treasury rates over the next six to 12 months, based on forward Treasury curves. If those forward curves are realized, stable value crediting rates could cross above money market yields in about six to 12 months too.
Whatever the direction of crediting rates, Ungerman noted that Callan, which provides advice and support to approximately 240 large defined contribution plans, continues to encourage plans to offer stable value funds rather than money market funds. That said, he acknowledged that in large plans stable value funds have generally had negative outflows for years. He said that’s attributable in part to the growth of target-date funds, which have become the qualified default investment alternative in most plans.
