The steady, dependable nature of stable value funds was not so attractive in booming markets, when the search for high yield dominated everything else. But now that the retirement finance dialogue has once again shifted to the need for Americans to put their money into secure investment vehicles, stable value funds are on the menu. James King, VP and head of Newark, New Jersey-based Prudential Retirement’s Stable Value Markets Group, believes that stable value funds should even be classified as qualified default investment alternatives (QDIAs) in employee sponsored retirement plans.
“We really think that there is a need for stable value funds to be offered as QDIAs because there is a need for products that both protect and grow principal as these do,” says King – who testified before the U.S. Department of Labor’s (DOL) Employee Retirement Income Security Act (ERISA) Advisory Council in late July. “Stable value funds should be a core asset class for retirement because they are different from other QDIA options that have specific exposure to equities, which is appropriate for some but not for all.”
The debate on stable value funds is only just beginning and it remains to be seen when and whether they will be included in the QDIA panoply. King will testify a second time before the ERISA Advisory Council in September and he is hoping that the recommendations ERISA will then make to the secretary of the DOL in November will include adding stable value to the QDIA menu.
According to King, stable value funds–which invest in high quality corporate and government bonds and are backed up by “wrapper” contracts provided by banks and insurance companies–provide sufficient returns over the long term similar to the kinds of returns delivered by intermediate bond funds and money market funds. In fact, research done by Wharton University professor David Babbel and Miguel Herce, principal at global consulting firm CRA International, has proven that over time, stable value funds actually offer even greater returns than the other two asset classes. From January 1998 to December 2008, Babbel and Herce’s research showed that stable value funds returned 6.3% in net value, compared to 4.1% for money market funds and 5.7% for intermediate bond funds.
Furthermore, the 2008 annual return for the S&P 500 was -37%, while stable value funds returned 4.68%, according to the Stable Value Investment Association’s (SVIA) 13th Annual Stable Value Investment and Policy Survey.
The SVIA also says that over $642 billion is currently invested in stable value funds–a significant figure, says Kansas City, Missouri-based Eric Jacobson, a fixed income investment specialist with Morningstar, Inc. With the focus remaining on investment safety and protection of principal, stable value funds are likely to become even more attractive to retirement savers, Jacobson says.