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Stable Value Funds: Still Popular, Despite Fewer Guarantees

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Despite a low interest-rate environment, 401(k) participants at New York Life Retirement Plan Services haven’t given up on stable value funds. In an analysis released Wednesday of its client base, the firm found half of all participants across its retirement platform have some of their 401(k) savings in a stable value investment.

“Gen Y has not experienced a positive market cycle during their professional careers, and Baby Boomers just watched a good portion of their retirement erode in rough market conditions,” Steven Dorval, managing director of retirement and investment strategy at New York Life Retirement Plan Services, said in a statement. “All participants require an investment option that will preserve principal and, at a minimum, keep up with inflation. These are among the reasons stable value continues to be a core savings option.”

The firm also found that since 2008, over 20% of retirement assets have been invested in stable value funds.

Their popularity is not attributed to an aging population looking to protect hard-earned assets. Boomers are most likely to favor the products, but Gen X participants allocate an average 12% of their assets to stable value funds, and Gen Y has an average allocation of 10%.

Although the Pension Protection Act of 2006 didn’t allow stable value funds to be selected as a qualified default investment alternative, 58% of boomers have allocations to stable value funds in their defined-contribution plan. Nearly one-third of Gen Y investors and 46% of Gen X investors have some portion of their DC fund allocated to stable value funds.

“A principal preservation asset class was once an afterthought for most sponsors and advisors, with a recordkeeper’s proprietary solution being an easy choice,” Patrick Murphy, managing director of sales for New York Life Retirement Plan Services, said in a statement. “No longer. Our advisors know this core asset class demands the same level of scrutiny as any other investment option.”

Murphy noted that this trend was likely to continue. “With interest rates expected to be negligible for the foreseeable future, money markets are not a palatable option for most sponsors – and stable value investments need to deliver a competitive rate of return with a credible guarantee.” 

Reuters reported on Wednesday that stable value funds may not remain stable. Over the past few years, the insurers who guarantee the principle in stable value funds have limited the types of investments they’re willing to cover.

For instance, J.P. Morgan Asset Management no longer guarantees principal on the stable value funds it offers, while Pacific Investment Management Co., or PIMCO, has an offering with a 24-month put instead of a 12 month. Some 401(k) plans use funds that only guarantee a portion of the principal.

“It’s a stark contrast from the stable value ethos that has existed for the better part of four decades, leaving some industry observers wondering if the new iteration of the funds is worth the investment,” Reuters reports. “The trend, if it continues, could mean less flexibility for plan sponsors and fewer guarantees for investors.”