Closing in the First Half of 2022
With the stock market down this year (SP 500 -13.3% as of May 31, 2022) and the bond market tracking the same direction (Bloomberg U.S. Aggregate -8.5% as of May 31, 2022) investors are trying to figure out what to do with the U .S. Federal Reserve shifting its new path on interest rate policy. And coinciding with policy makers concerns, investors are equally focused on the rising inflation as it continues to impact consumers, retirement investors are looking for havens in the storm. One investment available in most defined contribution plans that continues propelling through these swells, stable value is yielding a positive return and principal preservation.
What is Stable Value?
It is an investment fund (or product) that is invested in high quality, low duration and well diversified fixed income portfolio of bonds, that guarantees the principal and stated return with the use of contracts from banks and insurance companies. They are considered a conservative investment when compared to other types like equity, real estate or traditional bond funds.
Why it is so attractive for investors is when yields in the underlying fixed income portfolio move up or down the principal remains the same, unlike with a bond investment. The crediting rate may fluctuate, but it will remain above zero, and some stable value investments have higher minimum rates. For investors with less risk appetite, such as someone with a short-term investment horizon, stable value may be a good option for investing. Especially, when stock market volatility and fixed income yields are rising, having a principal protection investment in a retirement plan line up is critical for investment planning.
How to Invest in Stable Value?
As always, when selecting a stable value investment, it’s important to understand which type of plan you are investing for. Depending on the plan type will dictate which stable value investment is permitted (Table 1).
How to Choose a Stable Value Investment?
Applying a prudent process of evaluating the different stable value products available is the paramount for plan advisors and fiduciaries. Having an understanding the collective investment trust with banks and insurance company issued wrap contracts or the guaranteed investment contracts issued solely by insurance companies can impact the return profile, but also future plan changes. It is also important to consider adverse situations such as bankruptcy how that can impact plan participants. Having an independent expert to assist with the evaluation will help you to help to choose the right stable value investment for the plan.
If you are a plan sponsor or an advisor and would like to learn more about adding a stable value option, please Contact Us.