Stable value funds are ideal investments for millennial investors, according to Gina Mitchell, president of the Stable Value Investment Association.
Really, they’re good for any risk-averse investor, she said in an interview with ThinkAdvisor on Wednesday. For “anyone who’s concerned about risk, stable value can play a role.”
Mitchell’s organization, the Stable Value Investment Association, represents public and private defined contribution plan sponsors as well as investment managers and insurance companies that provide the investment contracts in stable value funds.
Stable value has been offered in 401(k) plans since their inception, Mitchell said. “It’s always been one of the foundations in defined contribution plans,” she said.
Stable value makes up about 12% of DC assets, Mitchell said, and SVIA members manage $721 billion in stable value, “about 70% to 80% of the stable value universe.”
Millennials fit squarely into that “concerned about risk” category.
“As you know, millennials are incredibly risk averse,” Mitchell said. “They’ve got about a third of their money in cash or money market funds in their 401(k).”
Millennials’ cash holdings vary depending on the report, but most agree younger investors are highly conservative. According to the first-quarter 2014 UBS Investor Watch, millennials have 52% of their assets in cash. A January report by Market Strategies International put their cash allocation much lower at 25%, “about the same risk profile as a 50-year-old.”
The 2014 Investment Company Institute Fact Book draws a different picture of millennials. The report, which is based on 2012 data, found investors in their 20s have 11% of their assets in safe investments, including guaranteed investment contracts, stable value funds, money market funds and bonds.
Regardless of how much they’re holding in money market funds, though, millennials could be getting better returns in a lower risk investment, according to Mitchell. “Money market funds are getting really, really low returns,” she said. “Stable value’s returning 190 basis points compared to that one basis point you may be making in a money market fund.”
Those higher returns combined with similar risk levels and liquidity found in money market funds make them great for risk-averse investors, according to Mitchell, but what makes them ideal for millennials is that it exposes them to investing in a safe way.
“One of the great things about stable value is that it’s a great entry point for millennials because it has a loose relationship to equities,” she said. “They can use it to get comfortable investing in equities in their 401(k) plan.”
Millennials are facing a lot of challenges that make them less comfortable with riskier investments like equities.
“This group has seen what’s happened with the financial crisis in 2008, what happened with their parents. They’ve been saddled with debt from their education. They have goals [like] homeownership, and that’s getting harder to do because you have to save more, get a bigger down payment,” Mitchell said.
Despite those challenges, younger investors are still investing in equities. According to the Investment Company Institute, 20-something investors had 36% of their assets in equities and company stock, and 46% in target-date funds. “All told, participants in their 20s had 73% of their 401(k) assets in equities,” according to the 2014 ICI Fact Book.
Mitchell noted that “target-date funds are great as a default investment for people who don’t want to do it all themselves.” While stable value is generally offered outside of a target-date fund, she said, it can also be included in a custom TDF.
“We’re seeing a lot of the big plans actually use stable value in their target-date fund,” she said. “It helps in that glide path. It’s a great diversifier, so it smooths out the volatility of the financial markets, particularly with equities.”
Consequently, plan sponsors are using stable value more frequently in their target-date funds, balanced funds and managed accounts, Mitchell said.
— Check out Time to Consider Alternatives to Money-Market Funds on ThinkAdvisor.