Capital preservation trends have prompted consultants and advisers to overwhelmingly favor stable value vs. money market funds.
A survey published in May by Pacific Investment Management Co. LLC, Newport Beach, Calif., reported that 81% of consultants to large DC plans said stable value was their top choice for capital preservation vs. 15% for money market funds. PIMCO surveyed 26 DC consultants who represent clients with $5.7 trillion in assets.
The same attitude held true for a companion PIMCO survey of 10 consultants and advisers to smaller plans responsible for $1.2 trillion in client DC assets. Seventy-eight percent said stable value was their top choice and 22% preferred money market funds.
Conversations with DC consultants often yield the words “long-term investor” when they discuss their preference for stable value vs. money market funds.
Most of Callan LLC’s clients only offer stable value, and that’s the usual recommendation by the firm, said Kyle Fekete, the San Francisco-based vice president and manager of research. “Generally, we won’t see that kind of movement because they are long-term investors,” Mr. Fekete said, referring to his doubt that sponsors might switch from stable value to money market funds if interest rates continue to rise.
As interest rates rise, “there may be some re-evaluation by sponsors,” said Mr. O’Meara of Willis Towers Watson, referring to the prospect of improving returns from money market funds.”We don’t encourage market timing.” A majority of his clients offer stable value or money market funds but not both.
Mr. O’Meara didn’t identify a tipping point that might encourage participants to switch. Possible selling points for money market funds are that they are more easily understood by participants and that sponsors believe a money market fund would be more familiar to participants, he said. Mr. O’Meara recalled the strategy of one client who still remembers the 2008-2009 economic crisis and who has insisted on offering only a money market fund. “You can’t argue with emotion,” he said.
Even as interest rates and money market rates improve, Invesco’s Mr. Jenkins said he doubted participants would be jumping back and forth between stable value and money market funds, and he doubted sponsors would be switching options due to the spread in returns between the two options.
“In this kind of environment, you don’t try to trade” among capital preservation options, Mr. Jenkins said. “I think most managers are preparing for this (rising-rate) environment.”
Stable value providers guard against massive switching by participants with an “equity wash.” This is a requirement that plan participants who want to move from a stable value fund to a money market fund must first put their money into a non-competing investment, such as an equity fund, for a certain period — usually 90 days — before investing in the money market fund. Putnam Investments, for example, requires a 90-day equity wash for clients who want to have both a stable value fund and a money market fund, said Steven McKay, Boston-based head of global defined contribution investment only.