Vanguard on MMFs vs. Stable Value
Vanguard released commentary by Mark Dorfler entitled, "Money market reform and stable value: Considerations for plan fiduciaries." He writes, "In light of changes to money market funds mandated by the Securities and Exchange Commission (SEC) and due to take effect October 14, 2016, many plan fiduciaries are taking the opportunity to review the options in their plan lineups for protecting principal. This commentary examines the benefits and risks of two common options: money market mutual funds and stable value funds. Although both types of investments seek to provide current income and preserve shareholders' principal investment by maintaining a net asset value (NAV) of $1 per share, they achieve this result through very different means. This paper also outlines these different investment approaches." Dorfler continues, "Money market mutual funds are SEC-registered investment funds that invest in very short-term, high quality securities. The amount of income a shareholder may receive from these securities largely depends on the current interest rate environment for such investments. The funds are designed to provide maximum liquidity to investors, and thus are considered one of Vanguard's most conservative investment options." He continues, "Stable value funds can take several forms, including bank collective trusts, insurance contracts, and separately managed accounts. One feature they all share is that they are not subject to SEC regulation -- and therefore also not subject to the SEC's money market fund rules. As a result, although they may be regulated to some degree under banking or insurance law, they don't have the same level of public reporting and disclosure requirements that apply to SEC-regulated investments like money market funds. In contrast to money market funds, stable value funds invest, directly or indirectly, in high-quality short- to intermediate-term fixed income investments. These investments typically provide more income than money market investments, but unlike the very short-term investments held by money market funds, the value of these investments can fluctuate significantly on a daily basis. As a result, stable value funds purchase insurance against daily market fluctuations that allows the stable value fund to use book-value, rather than market-value, accounting, permitting the fund to maintain a net asset value of $1 per share." He concludes, "A plan's fiduciaries are not required to offer any particular type of investment as the plan's protected-principal option. In reviewing money markets versus stable value in this regard, fiduciaries should undertake a prudent process to understand and evaluate the comparative benefits and risks of each investment vehicle and then make a reasoned choice. As this paper has described, either vehicle may be an appropriate investment option. Stable value offers bond-like performance with much lower volatility than traditional bond funds. By contrast, money market funds have had little return since the global financial crisis as a result of the zero-interest rate environment that prevailed until very recently, but they provide a much higher degree of liquidity and flexibility for plan fiduciaries than stable value funds. Plan fiduciaries considering stable value should particularly scrutinize their plan's design, participant demographics, and the likelihood of plan events. Fiduciaries should weigh these factors against stable value's attractive performance record and potential for preserving principal. In managing performance expectations, plan fiduciaries must always understand that past performance is no guarantee of future returns. Although the performance gap between stable value and money market funds may make stable value appear attractive today, that gap may narrow in the future as interest rates are expected to increase from their historically low levels."
