Stable Value and Millennials
by John Barrasso
Let’s take a short quiz. Which group is more likely to consider a money market fund the best choice for their retirement nest egg?
A. Retirees or near retirees
D. Managers of money market funds
If you answered C, congratulations. You’re either an astute contrarian, or someone who’s read some of the many surveys showing that millennials—often defined as those Americans born between 1980 and 2000—can see themselves as extraordinarily risk-averse investors. A 2014 Bankrate study found, for example, that 39% of millennials—the most of any age group—considered cash the preferred investment for money they wouldn’t need for at least 10 years.* Yet returns on cash often fall below the rate of inflation, making it, for most people, a poor choice for building the wealth one will need to retire successfully. Meanwhile, many millennials have not begun investing for retirement at all. In a 2016 survey of 2,000 adults, 57% of millennials reported they had not started saving for retirement.**
What do these statistics have to do with stable value? Potentially, quite a lot.
While it’s impossible to know exactly what’s driving millennials to shy away from investing for retirement, it’s easy to infer some reasons. Paying off student loans, saving for a house and taking on child-care expenses may soak up some of the money they might otherwise steer toward retirement saving. Meanwhile, in the relatively short time they’ve been old enough to work, millennials have been witness to a series of traumatic financial market upheavals, headlined by the dotcom bust of 2000 and the housing bust/credit crunch of 2008. In the latter crisis, many saw parents and other older family members suffer crushing losses in both the housing and financial markets—losses from which some have yet to recover.
If fear of market volatility is keeping millennials from investing, or investing in a manner appropriate for their age, access to stable value products might be enough to pull some of them off the sidelines. Returns on stable value funds historically have outpaced those available from money market funds, yet still have exhibited low volatility.
The challenge for the stable value industry—indeed, for the retirement industry as a whole—is twofold. The first is to educate millennials about the benefits of stable value products. The second is to make those products more widely available in defined contribution plans. Right now, only about half of those plans offer a stable value investment option, according to the Stable Value Investment Association.
It isn’t just millennials themselves who need to know more about stable value, though. The retirement industry, including stable value providers and retirement plan advisors, also must continue to educate plan sponsors about the unique benefits, such as capital preservation and steady return guarantees that stable value products offer.
Expanding stable value now is particularly timely given that new regulations for money market funds are taking effect this fall. These new rules will require, for the first time, that net asset values for institutional prime money market funds be allowed to float with their market value. The new regulations also will allow prime money market funds to impose redemption fees and gates to manage liquidity pressures. Absent a steady net asset value, and with the potential for redemption penalties, money market funds may look less attractive to cautious millennial investors than they have in the past.
The stable value story is a compelling one that resonates with plan sponsors who have embraced the product. As revealed in our recent Prudential Retirement® white paper, Expanding the Case for Stable Value, plan sponsors who have adopted stable value associate it with improved plan participation and participant deferral rates. Both can drive better participant outcomes. Millennials don’t deserve to miss out on that opportunity.