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A Closer Look at Stable Value Funds Performance
Stable Value Investment Association

Stable value has been a mainstay investment in qualified retirement plans since before the introduction of 401(k) plans. Stable value continues to be a popular fixed income option within many defined contribution (DC) plans even as regulators focus on the benefits of equity-focused asset allocation strategies such as target date funds. But has stable value become somehow less important as the retirement industry adapts to the DC plan's new found role as the primary pension plan for millions of Americans? Today stable value accounts for $413 billion in retirement plan assets. Despite stable value's importance to investors, it remains an understudied asset class within the DC arena. Intuitively, many in the financial services industry have long been aware of the important role stable value can play in portfolio asset allocation. But until now, rigorous study of the appropriate role of this asset class has been light. To address this academic knowledge gap, the Stable Value Investment Association sponsored an independent research study conducted by Professors David Babbel, PhD and Miguel Herce, PhD. Doctor Babbel is a Professor of Insurance and Finance at the Wharton School at the University of Pennsylvania and a Vice President and Senior Advisor at Charles River Associates International (CRAI). Prior to joining CRAI, Doctor Herce served as a professor of Econometrics at the University of North Carolina at Chapel Hill. The study examines the risks and net returns of various assets. Stable value net returns were developed from data supplied by 12 stable value managers who manage funds representing $189 billion in assets. The conclusions of this analysis are compelling - by enabling greater returns for a given level of risk, stable value greatly enhances the likelihood of DC plan participants meeting their retirement goals.

Overview of the Analysis
Since the inception of the contemporary stable value fund almost 35 years ago, stable value funds have provided attractive fixed income returns with very low volatility. As a result, DC plan participants have come to rely upon stable value to protect assets from risk of loss, to diversify their portfolios and to blunt the risk of higher volatility investments like stock funds. A Closer Look at Stable Value Funds Performance is the first study to closely evaluate stable value from an investor's point of view. It carefully compares stable value performance to other common investment alternatives such as U.S. large and small stocks, long-term government and corporate bonds, intermediate bonds, and money market investments.

Before the release of this study, plan providers debated the relative merits of offering stable value versus other fixed income options such as money market funds or intermediate bonds. Now, through state-of-the-art statistical techniques such as mean-variance analysis, stochastic dominance analysis, and multi-period utility analysis, the answer is clear. Offering stable value as the core fixed income option in a DC line-up provides a significant benefit to plan participants. By delivering investment performance characteristic of intermediate bonds with money-market-like stability, stable value provides superior return per unit of risk. As illustrated in the diagram below, stable value shifts the efficient frontier leftward, outperforms money market funds over time and in nearly all market conditions, and provides a better risk-adjusted return than intermediate bonds over time and in nearly all market conditions.

As a result, stable value plays an important role in a portfolio context. It allows plan participants to increase the return of his or her portfolio for any given level of risk or decrease the risk of their portfolio for any level of return. This finding has important implications for asset allocation strategies such as target date or target risk. The central reason for using a target date or target risk fund is to effectively tailor participants' asset allocation to an appropriate measure of risk tolerance. Since stable value favorably shifts the efficient frontier, it naturally follows that it should serve as an important part of all target date and target risk strategies that include a fixed income component.

"The point isn't that investors should shun equities entirely, but rather that if they are combining them with other assets to build a diversified portfolio, those other assets should be stable value funds. They provide investors with a whole different way of planning for the future," says Professor David Babbel.

The Power of Staying in a Qualified Plan
Participants that elect to roll out of their DC plan lose two important advantages: institutional pricing and access to stable value funds. The high fees often associated with retail investing are detrimental to participants who rollover their DC plan balances to IRAs. The availability and performance of stable value provides another compelling reason for participants to keep their money in a DC plan. Stable value also serves as a powerful investment option in an individual's retirement years, providing steady, predictable income while insulating a portfolio from the shock of a market correction that could dramatically reduce a retiree's nest-egg. As such, stable value has an important role to play in meeting a retiree's need for steady income during retirement.

Conclusion
As the study shows, stable value can greatly enhance the likelihood of DC plan participants meeting their retirement goals. Even as DC plan designs change to meet the needs of a shifting retirement landscape one thing seems clear - stable value has an important role to play. Plan sponsors should consider investment line-ups that employ stable value as the core fixed income fund and seek pre-mixed asset allocation strategies that naturally incorporate stable value into their design as well as provide that stable value is an investment option for all participants. A PDF of the study is available @ www.stablevalue.org.