We mentioned a recent "MetLife Stable Value Study in our Dec. 14 "Link of the Day", but we didn't have time to give it more coverage at the time. Today, however (since we're stuck in the snow), we excerpt in more detail from the "2017 Stable Value Study." MetLife commissioned the study and survey "plan sponsors, stable value fund providers and advisors ... to gain strategic insight into the current marketplace for stable value, a capital preservation option offered in defined contribution (DC) plans." They explain, "In fact, stable value is the only capital preservation option designed specifically for qualified retirement plans. Today, approximately 11% of the $7.5 trillion in DC plan assets is in stable value."
The report's introduction tells us, "As we release this study, it has been just over one year since the MMF reform rules went into effect in October 2016. This year's study explores plan sponsors' familiarity with MMF reform, and the extent to which they have taken steps to evaluate their use of money market in their DC plans. The study also looks at other trends, such as the use of stable value in target date funds (TDFs), both off-the-shelf and custom. In addition to the insights we obtained by surveying DC plan sponsors, we also gained perspective on the use of stable value and other capital preservation options through in-depth interviews with stable value fund (SVF) providers and DC plan advisors whose clients use stable value funds in their plans."
Regarding the study's findings, they say, "Today, stable value is the most prevalent capital preservation option offered in DC plans, with most plan sponsors surveyed offering stable value (83%, essentially unchanged from 82% in 2015). This includes nearly half (46%) offering stable value but not money market funds (up from 38% in 2015) and another 36% offering both stable value and money market funds in their plans (down from 45% in 2015). The change in the mix of stable value (both with and without money market) is statistically significant."
MetLife's study continues, "The use of money market funds has experienced a statistically significant decline overall since 2015, with just over half of sponsors (52%, compared to 62% in 2015) offering money market as a capital preservation option, either on its own (16%, down from 18% in 2015) or in combination with stable value (36%, down from 45% in 2015). Only 2% of plan sponsors offer a capital preservation option other than stable value or money market, such as laddered short-term fixed income options. While the large majority of plan sponsors who offer stable value (91%) have been doing so for more than two years, a notable 9% added stable value in the past two years. In aggregate, the data confirm meaningful movement away from money market funds as a capital preservation option in DC plans."
It states, "Over half of plan sponsors surveyed (53%) say they are at least somewhat familiar with MMF reform, with just 10% saying they are very familiar. Among plan sponsors who are reasonably familiar with MMF reform, a clear majority (83%) feel that stable value is a more attractive capital preservation option for plan participants than money market funds. Even among plan sponsors familiar with the rules whose plans offer only a money market fund, a majority (55%) think stable value is a better option."
The study comments, "Only 31% of plan sponsors overall evaluated their use of money market funds as their plans' capital preservation option in light of MMF reform. Among those who did, most (84%) sought advice about alternatives from a consultant or advisor. Sixty percent of advisors and 63% of SVF providers surveyed said that at least some of their plan sponsor clients reviewed their use of money market in light of MMF reform. Most advisors who said their clients would consider/have considered excluding money market altogether cite low returns as a driver (83%)."
The survey says, "Four in 10 plan sponsors who evaluated their use of money market in light of the reform (41%) replaced their money market funds, with over half (55%) saying they used government money market as a replacement and 29% saying they used stable value. All advisors who reported having clients who evaluated their use of money market and replaced their money market funds as a result of the reform said that stable value was the replacement. Nearly two-thirds of SVF providers with clients who evaluated their use of money market funds and replaced them as a result of the reform (64%) say that stable value took money market's place, while 27% say government money market funds were used."
It also tells us, "Plan sponsors who replaced their money market funds with government money market over stable value gave several reasons for this selection: liquidity; the desire for an alternative to stable value (because they already had stable value in their plan); government money market's similarity to money market funds; or, they do not like some aspects of stable value. Despite the near universal choice of government money market funds as a money market fund replacement for those who did not move to stable value, nearly two-thirds of those who moved into government money market (65%) recognized that increased demand for government paper amid limited supply could keep government money market funds' nominal yields low and real yields negative."
They study concludes, "Today, with $814 billion in assets in DC plans, it is clear that stable value has earned the trust of DC plan participants who want to preserve the value of their retirement savings and insulate their assets from market volatility. The most popular capital preservation option in DC plans today, stable value is poised for considerable growth, particularly in response to MMF reform and emerging trends such as the use of stable value as the fixed income component of a TDF or model portfolio."
It reiterates, "Now that we have passed the one-year anniversary of the 2016 MMF reform, it is a suitable time to review the actions that have been taken -- or will be taken -- to comply with the new rules. The decision to retain an existing money market fund or replace the fund with another option, including stable value, will have a considerable impact on participant outcomes, and is subject to ERISA's demanding fiduciary duty standards. Some plan sponsors may be reluctant to give up money market entirely, even though those with money market recognize the appeal of stable value following MMF reform. We believe, however, that plan sponsors must ask themselves whether there is any place in a retirement plan line-up for a capital preservation option that does not keep pace with inflation."
They tell us, "While most plan sponsors believe they have solid documentation for justifying their choice of capital preservation option, fewer have hard data to support their decisions. From a fiduciary standpoint, if they have not already done so, DC plan sponsors should promptly complete a quantitative review of their plans' capital preservation option(s) and consider stable value as an alternative to money market funds. Since advisors play a significant role in plan sponsors' decisions about capital preservation options, it is important that advisors fully communicate the advantages of stable value and provide supporting data to share with plan sponsors for documentation purposes."
Finally, the study states, "As this year's findings show, many plan sponsors recognize that stable value's performance track record is better than that of money market funds. However, as noted in MetLife's 2015 Stable Value Study and reinforced in this 2017 study, there remains a need for the stable value industry to encourage a greater understanding for -- and appreciation of -- stable value's risk and return profile vis-a-vis other capital preservation options. For some plan sponsors, the perceived complexity of stable value is standing in the way of greater usage, as is a perception that DC plan participants are demanding money market funds. The stable value industry should seek to simplify, for both sponsors and participants, the ways in which it communicates about the product. Simplifying the value proposition for stable value through easy-to-understand marketing and educational materials can help to enhance its appeal, and could lead to even greater adoption by plan sponsors and higher allocations by plan participants."
