The Stable Value Investment Association would like to address a recent commentary by Henry Heitman that contains inaccurate characterizations of stable value that attempted to discredit stable value products and the asset class. The membership of the SVIA represents all the entities in the stable value industry: stable value managers, issuers as well as plan sponsors for the U.S. defined contribution market.
For more than 30 years, stable value products have played an important role helping retirement plan participants safely accumulate retirement savings. Stable products are considered a core investment option, with more than 167,000 defined contribution plans making stable value products available to millions of participants. Participant assets allocated to stable value total more than $831 billion.
Stable value focuses on preserving retirement plan participants' invested capital (or principal) while providing liquidity and steady, positive returns that exceed money market investments over time. Over full market cycles, most stable value options seek to provide returns similar to short- to intermediate-maturity fixed-income investments without the return volatility associated with those strategies. This results in higher long-term expected return of stable value compared to money market investments along with similar principal stability.
While the structure of stable value may vary, the important similarity in all stable value options is the use of investment contracts, which are issued by banks and insurance companies. These contracts help smooth the return volatility of the underlying fixed-income investments and, importantly, they typically allow participants to transact at their invested balance plus any accrued interest.
As a result of the smoothing feature, stable value returns lag current yields (outperforming when rates fall but underperforming when rates increase) but provide consistent and more predictable returns compared to volatile market rates. The smooth crediting rate along with principal guarantee feature of stable value has provided predictable investment returns for millions of participants through many challenging economic environments; thus, the long-term benefits of stable value for investors is undeniable.
During times of rising rates, some may question the trade-offs between stable value and money market funds, the other common principal preservation option. The Stable Value Investment Association address these questions in its white paper Stable Value and Rising Interest Rates. In summary, there will be short periods of time where money markets may outperform stable value; however, those periods of time are generally short-lived and the performance differential particularly small. Stable value's principal preservation and consistent conservative returns as well as diversification benefits explain why stable value continues to be the conservative asset allocation choice in defined contribution plans.