By Randy Myers
The retirement industry has spent much of the past decade searching for smart ways to help retirement plan participants convert retirement savings into a reliable stream of retirement income. But plan sponsors have been slow to take up many of the innovative new products offered by plan providers, and even where they are available, plan participants have been hesitant to use them. Stable value funds, already offered in a majority of defined contribution retirement plans, could be an overlooked part of the retirement income solution.
Speaking at the 2024 Stable Value Investment Association’s Fall Forum in Washington, D.C., stable value providers agreed that stable value funds could serve as a core component of a “retirement tier” of products and services within the investment lineups of defined contribution plans.
In fact, they noted, many older plan participants already appear to grasp the important role stable value can play in generating retirement income. Zach Gieske, SVIA president, cited the results of the SVIA 2021 Recordkeeper Survey indicating that plan participants 70 and older allocate an average of 25% of their retirement account balances to stable value—a figure that includes all participants, not just those that use stable value.
Nick Gage, head of stable value contract strategy at Galliard Capital Management, added that 90% of the stable value assets his firm manages are owned by people 50 and older.
“Participants are already using this product to manage volatility in retirement,” Gieske said.
To promote even broader use of stable value, Mercer and the SVIA recently partnered to produce a white paper entitled “Stable Value and the Retirement Tier” that outlines the expanded role stable value could play in helping to generate retirement income.
One problem with relying on retirement tiers, the panelists said, is that plan sponsors have been slow to add them to their investment menus. Preet Prashar, director of defined contribution strategic research teams and co-chair of the Stable Value Strategic Research Team at Mercer, attributed the tepid embrace of the concept to a fear of the unknown and a reluctance to be a first mover, especially given the litigious environment in which plans operate today. Technology can be a challenge, too, he said, when plans must work with recordkeepers to implement retirement income solutions. Plan participant behavior can be a hindrance as well. Prashar cited the experience of one plan sponsor that began offering a retirement income guarantee solution 10 years ago but has seen fewer than 20 people use it so far.
Austin Roberds, senior investment consultant at Mercer and co-chair of the firm’s Stable Value Strategic Research Team, has seen similar outcomes. He estimated that it’s been seven years since he started discussing retirement income solutions with plan sponsor clients but said he has yet to see any of them adopt the new tools that have come to market. To be fair, he added, plan sponsors can sometimes feel like they’re playing “whack-a-mole” as they find themselves continually challenged to address new issues, including regulatory changes, litigation, and participants saving too little for retirement—all factors that can make it harder to focus on adding new features to their plans.
As to what a retirement tier might look like, Prashar said it could include a stable value option and perhaps two other categories of products, one offering guarantees and the other not. In the guaranteed space might be a target-date fund with a guarantee feature, perhaps an annuity and perhaps not. In the non-guaranteed space, solutions could include managed payout funds or guided spending advice.
Stable value would be an attractive component of a retirement tier, the speakers said, because it is easily understood by plan participants, is already available to and being used by them, and offers both principal preservation and liquidity guarantees. Stable value could be especially appropriate, they noted, for plan participants looking to reliably fund near-term (up to five years) living expenses.
All those benefits that stable value can offer, Gieske suggested, need to be communicated more frequently to plan participants. Lucas Robustelli, sales director in Stable Value Markets for wrap issuer MetLife, said he sees talking about the retirement tier concept as a good way to educate participants about how suitable stable value is for anyone in or near retirement. The retirement tier concept itself, he added, “is certainly a positive from an issuer perspective.”
Toward the close of the panel discussion, Prashar and Roberds suggested that the stable value industry could help make its product more attractive to plan sponsors and participants by offering higher returns and charging lower fees. They conceded that doing so is easier said than done. In terms of fees, for example, stable value expense ratios must include the cost of wrap contracts, which are a tradeoff for guaranteeing that participants can make qualified withdrawals or transfers at book value.
Still, Gage didn’t dismiss the suggestion out of hand. He noted that increasing numbers of plan sponsors see value in keeping participants in their plans after they retire. Accordingly, they need to make that an attractive option for participants, and one way of doing that would be by adding a retirement tier of income solutions. Including stable value in that retirement tier, Gage said, could open the door to better stable value performance.
“If plan design changes such that people are leaving their money in the plan, that changes the expected withdrawal liability that stable value product managers are managing to,” Gage explained. And, he said, that change could give managers more flexibility to take additional risk in their portfolios and potentially boost stable value returns.
