For years, the stable value industry has been trying to figure out how to have its product better represented in target-date funds, with modest results. At the 2017 SVIA Fall Forum, industry leaders talked about the challenges they’ve faced on this front and what they might do about it.
“I think there are many who still view target-date funds and stable value as two things that generally just disagree, so we have a lot of work to do,” said Greg Jenkins, head of the institutional defined contribution business at investment manager Invesco Ltd. “And I think there’s a lack of guidance from the industry on that.” Jenkins was joined in a panel discussion of the topic by LeAnn Bickel, chief administrative officer for stable value at Invesco, and Susan Graef, a principal and portfolio manager with the stable value team at The Vanguard Group.
Target-date funds have been the fastest-growing asset class in defined contribution plans since the Department of Labor designated them a qualified default investment option in 2007. However, nearly all off-the-shelf versions are structured as mutual funds, a structure not available to stable value funds. Accordingly, the stable value community has focused primarily on trying to get stable value included in custom target-date funds structured as collective investment trusts and used principally by very large retirement plans. However, Jenkins said that of the approximately 150 target-date fund arrays he’s been able to identify, only about 15 to 20 have a stable value component. Vanguard and some other investment managers have been able to place their stable value funds in collective trusts used in the 529 college savings plan market, but Graef noted that the 529 market differs from the 401(k) market in material ways, featuring younger plans with shorter investment horizons.
Even with those differences, Graef said, the biggest challenge to breaking into the 529 market was the same one the industry faces in the retirement plan market: getting users confident with the stable value product.
Despite the challenges, Jenkins said target-date funds are an opportunity too big to ignore, especially as collective trusts continue to capture a bigger share of the target-date market. He advised his colleagues in the SVIA to start focusing less on making the investment case for including stable value in target-date funds and more on resolving the structural challenges of doing so—and on educating target-date managers, plan sponsors and plan consultants on the solutions. Among the challenges: getting those three groups to accept the restrictions on stable value funds that stem from employer-sponsored events—or doing away with the restrictions altogether—and assuring those groups that the stable value industry has enough wrap capacity to handle their business. Many plan sponsors, Jenkins said, remain scarred by memories of the wrap capacity crunch that temporarily struck the industry during and immediately after the 2008 financial crisis.
Jenkins also encouraged his SVIA colleagues to follow the example of a private real estate industry group to which he belongs. In seeking to promote the use of their asset class in collective trusts, he said, that group came together to develop best-practice papers and other resources for potential clients and spoke with one voice to collective trust managers.
“That’s what we have in mind—create a working group,” Bickel quickly noted. That would allow the industry to coalesce around strategy and speak with a common voice to asset managers, plan sponsors and plan consultants, she elaborated.
