MarketWatch Hits Stable Value Funds
MarketWatch writes, "Stable value funds have become today's most popular 401(k) investment, but they come with complex risks." The article tells us, "Stable value funds, which combine diversified bond portfolios with bank or insurance-company contracts that help guard against market volatility, took in 85% of 401(k) trading inflows in May, according to the Alight Solutions 401(k) Index. Looking at data going back to 2013, stable value funds have never attracted such a large percentage of trading inflows, according to the index.... Right now, 'stable value is the vehicle of choice for capital preservation' in 401(k)s and other defined-contribution plans, said Steven McKay [of] Putnam Investments, where stable-value assets climbed 87% between the end of 2019 and June of this year, to $16.4 billion." It explains, "While stable value funds' relatively smooth, consistent returns can look appealing when both stocks and bonds are sliding, their inner workings involve complicated tradeoffs and risks that vary widely depending on how the fund is structured. In some of these products, the underlying assets are owned by the retirement plan, fees are transparent, and there's a diversified set of issuers providing the contracts that ensure smooth and steady returns. In other stable value products, the retirement plan owns nothing but a piece of paper: A single insurance company owns the assets and provides the guarantee, earning a spread that's typically not disclosed to investors and exposing plan participants to considerable risk in the event that insurer goes belly up." They quote consultant Chris Tobe, "People don't understand the risk they're taking." The MarketWatch piece comments, "Investors should also be aware of trading restrictions and how rising rates may affect these funds, stable value experts say. As interest rates rise, stable value returns will ultimately move higher, but they may react more slowly than some other investments such as money market funds. Plan participants can generally sell their stable value holdings whenever they like but in many cases can't move their money directly from stable value to a money market fund. And at the plan level, dumping a stable value fund isn't easy: In some stable value products, it can take years for the plan to extract all its assets from the fund." Finally, they add, "In many retirement plans, stable value is now the only conservative investment option. These funds, which are available only in defined-contribution plans such as 401(k)s and 403(b)s, had about $918 billion in assets as of the first quarter of this year, accounting for about 9% of all defined-contribution plan assets, according to the Stable Value Investment Association, an industry group. But unlike many other 401(k) investment options, stable value funds aren't mutual funds and can't be easily tracked and compared using ticker symbols. Stable value investments, like money market funds, have shown cracks during past periods of market turmoil. In early 2009 Congressional testimony, former Federal Reserve chair Ben Bernanke defended the Fed's 2008 bailout of AIG, saying that if the insurance giant had been allowed to fail, 'workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear.'"
