By Randy Myers
Stable value funds have experienced negative cash flows since 2022. In a[EA1] wide-ranging panel presentation at the 2024 SVIA Spring Seminar, retirement industry consultants and researchers suggested a few explanations for those outflows and also discussed steps plan sponsors can take to make their plans more responsive to the needs of plan participants.
Emily Hylton, senior vice president with investment consulting firm Callan LLC, quantified money flows out of stable value by pointing to data from The Callan DC Index, which tracks the performance of more than 100 large defined contribution plans with combined assets of approximately $400 billion. Net cash flows for stable value funds in those plans were down about 45% over the past year, she said. Stable value’s most direct competitor, money market funds, saw positive cash flows of about 2%. Target-date funds had highly positive cash flows, up about 84%. For the past three years[EA2] , the numbers show a similar if less dramatic pattern: -16% for stable value, +2% for money market funds, and +74% for target-date funds.
Net outflows from stable value funds have coincided with the sharp uptick in short-term interest rates from March 2022 through July 2023, which has created an inverted yield curve and left money market returns temporarily higher than stable value crediting rates.
Pamela Hess, executive director for the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center, also spoke during the session. DCIIA brings together organizations across the DC ecosystem to advocate for best practices and promote industry education and dialogue. Hess pointed to the Alight 401(k) Index which, similar to Callan’s index, shows that recent negative cash flows experienced by stable value funds are largely not attributable to participants simply transferring money into another investment option within their retirement plan. Rather, many stable value providers suspect that participants are transferring some of that money to individual retirement accounts, where it may wind up in money market funds or, given the strong performance of the stock market over the past two years, stock funds. Additionally, a larger driver of cash flows is the ongoing, systematic movement into target-date portfolios that has been witnessed across the entire DC plan industry.
Hardship loans and withdrawals can impact cash flows
Overall cash flows in defined contribution plans are impacted not only by participants’ investment decisions but also by the degree to which participants take money out of their plans before retirement in the form of hardship loans or withdrawals. While the number who take money out early is a small subset of all participants, Hess and her colleague, DCIIA President and Chief Executive Officer Lew Minsky, noted that those making early withdrawals are often the same people already most at risk of not meeting their retirement savings goals.
DCIIA is conducting research on retirement plan usage via the Collaborative for Equitable Retirement Savings (CFERS), a joint initiative between DCIIA, the Aspen Institute Financial Security Program, and Morningstar Retirement. Research by CFERS indicates that women are more likely than men to access their savings before retiring, with Black women especially likely to take hardship withdrawals, Hess said.
Hylton added that an analysis of one large plan showed the degree to which small groups of participants account for most early withdrawals. In that plan, approximately 25% of participants had taken a loan, Hylton noted, but within that group 70% had more than one loan.
“The plan sponsor is concerned because those are assets that are being pulled out of the plan,” Hylton said. Combined with distributions taken by participants under terms of the CARES Act of 2020, which was designed to help blunt the financial impact of the coronavirus pandemic, she said, this plan had seen about $1 billion in pre-retirement cash outflows.
Some plan sponsors appear to have found ways to mute the impact of loans, beyond disallowing or limiting them. Minsky recounted the experience of one plan sponsor that required participants to quantify and justify the need for a hardship loan or withdrawal before it would be granted—and as a result saw less such activity than its peers.
Minsky added that plan cash flows also can be influenced by plan design. Introducing emergency savings accounts as a supplement to retirement plans, for example, could help some plan participants avoid the need to borrow from their retirement accounts when faced with unexpected bills.
Building better retirement plans
At a higher level, plan sponsors recognize that the better a retirement plan performs for participants the better the odds participants will reach their retirement goals. Among topics plan sponsors and their consultants and advisors are exploring today, the presenters said, are the use of stable value within custom target-date funds, the question of whether to add money market funds to plan investment menus, and the use of managed accounts as a plan investment option.
While custom target-date funds are still used far less than off-the-shelf funds, Hylton noted that about 18% of Callan’s large-plan clients use them, including about a third of plans with $5 billion or more in assets. While creating custom funds could be an added expense, Hess said larger plans often can achieve economies of scale by building them out of the core funds in their investment lineup.
Both Hylton and Hess spoke favorably about continuing to offer stable value as the capital preservation investment option in retirement plans even though money market funds are momentarily offering higher returns and even though some participants may be asking for a way to tap into those higher rates.
“We, as consultants, do not believe that return-chasing on behalf of participants is, in general, a good idea,” Hylton said. “Adding a money market option alongside a stable value option generally is not something we’re going to recommend.”
As plan sponsors and their advisors look for ways to make retirement plans more responsive to the unique needs of individual investors, some have been offering managed accounts as an investment option within their plan. These are accounts in which a professional manager steers the participant into a portfolio tailored to personal factors such as their age, salary, contribution rate, and risk tolerance, as well as the quantity and types of assets they hold outside the plan.
Hylton cautioned that Callan’s research shows that the glide paths developed for managed accounts—the rate at which they tend to grow more conservative as participants near retirement—do not differ significantly from those for target-date funds. And, she added, many participants don’t take the time to share all their personal data with the managed account provider. That lack of sharing, she said, can leave participants paying more for a managed account than they would for a target-date fund only to get similar results.
Hess noted that some participants may find it beneficial to pay for a service that lets them call an investment professional to talk about their retirement account.
Minsky added that he had a bullish view on the long-term appeal of managed accounts, which he predicted may eventually replace target-date funds as qualified default investment options in some defined contribution plans. Some providers, he said, may even undercut target-date pricing and use managed accounts as a loss leader to gain scale.
Minsky also said he anticipates that pooled employer plans will become more popular over time as a way to offload some of the fiduciary risks associated with operating a plan. In a similar vein, Hylton predicted that plans will increasingly turn to outsourced chief investment officers to offload some of their investment responsibilities and risks, even if for only part of their investment lineup. She also predicted that plans will continue to streamline investment menus, that recordkeeping fees will continue to fall, and that stable value will remain a component of most retirement plans.
Regardless of how plan sponsors might tweak their plans, Hylton suggested it would behoove them to learn as much as possible about how plan participants are using their plans, and why they are using them that way.
“The more that plan sponsors learn about how participants are accessing the plan and where … (cash) flows are going, the better communication they can provide to participants to keep those assets within the plan,” she said.
