That 401(k) participants are putting more money into stable value may be an understandable reaction to the sour market in equities for the last year and a half but should provoke concern after the tumble in the guaranteed investment contract market in the 1990s. Stable value now yielding more than 6% may look good in contrast with equities. But how stable is the value?
In a few words: so far plenty. Some sponsors, in fact, may be paying a high price for stability in overreaction to defaults.
Let's not forget the past decade's exodus from guaranteed investment contracts. That withdrawal was led by the then-increasing lure to participants of equities, coupled with concern about the ability of stable value providers to fulfill guaranteed contracts.
Today, however, whether traditional guaranteed investment contracts or synthetic GICs, stable value isn't necessarily the same as its predecessor. The stable value market is far more complex in terms of instruments, even while interest rates are volatile. At the same time, there are considerably more tools available to investors to analyze the stable value market.
With traditional GICs, there hasn't been a default for almost a decade. Even in the defaults of the early 1990s - Executive Life Insurance Co., Mutual Benefit Life Insurance Co. and Confederation Life Insurance Co. - participants fared well, considering the circumstances, according to Peter E. Bowles, president and chief investment officer, Fiduciary Capital Management Inc. The latter two ultimately paid 100% of principal and often above competitive interest rates. Executive Life holders got back at least their entire principal in states that insured against such loses and even in those states that didn't, holders got back at least 92%.
"The problem was you didn't get paid when you wanted to," Mr. Bowles noted.
As an asset class, he said, the GIC market has had a much lower default rate than bonds over the last three decades - 3% compared with 8% - and a better recovery rate - almost 100%, as noted in the aforementioned cases, compared with 56 cents on the dollar for bonds.
For 401(k) plans, the comeback of stable value, in all its diverse forms, enhances the investment choices. Participants are putting more money into stable value, but not in a panic overreaction to the sharp fall in equities. As Mr. Bowles notes, his firm has seen a "modest" increase in new money. "That's healthy," he said. "It means people aren't bailing out of equities." They just feel comfortable with more diversity.
