By KENT BARTELL
When it comes to making educated choices about their retirement plans, many employees don’t know where to start. Since there are many different investment options to choose from, they often decide on investments that appear safe and familiar — but is familiarity really the best investment strategy?
Retirement plan participants often want to invest more conservatively as they grow older. For investors seeking safety, liquidity and yield, many plans recommend investing in a money market fund. Traditionally, this makes sense: Money market funds are familiar, and they offer low volatility and slow, dependable gains.
However, despite their popularity, money market funds aren’t necessarily the best fit. They do not always guarantee safety of principal or interest, as their rate of return fluctuates daily. In addition, they do not always ensure a stable rate of return — in fact, even negative returns are possible during harsh economic periods and financial crises. This was the case in the last economic recession, where the government had to step in to protect money market fund shareholders under the Treasury Temporary Guarantee Program.
The occasional volatility of money market funds means they are not always the best investment choice for customers looking to retire in the near future. Instead, you may want to suggest a different solution for customers seeking a safer way to invest their retirement money: stable asset funds.
The Principles Of A Stable Asset Fund
Stable asset funds, also known as stable value funds, are designed for investors who are looking for a retirement plan with a guaranteed return of principal and interest, along with competitive crediting rates and liquidity. Although stable asset funds and money market accounts enjoy some similarities, several key aspects separate them; namely, many stable asset funds have locked in quarterly interest rates and are less risky, as the investment is not reliant on an individual business or stock.
For plan participants who aren’t familiar with them, stable asset funds offer a number of benefits.
By combining the safety and low volatility of money market funds with the higher returns of intermediate bond funds, stable asset funds are one of the few investment options that produce positive returns during sharp economic downturns. In the most recent financial crisis, stable asset funds consistently produced higher returns than most other asset classes.
Another benefit of stable asset funds is that some contracts offer a guaranteed crediting rate that is declared in advance (usually one week before each quarter) and is reset periodically. This means rates are often higher and are less volatile than money market funds, which can fluctuate daily.
Stable asset funds offer a minimum guaranteed interest rate. Some contracts offer a guaranteed crediting rate that the stable asset fund will never drop below (such as 1%).
For those who are attracted to conservative investments, stable asset funds are consistently backed by a diversified, high-quality portfolio of fixed-income securities plus commercial mortgages and/or mortgage-backed securities.
Daily liquidity is available for participant benefits and withdrawals at book value (principal and accrued interest) regardless of market conditions. Note, however, that this same liquidity does not always apply on the plan level, and plans may be subject to lock-up periods and/or market-value adjustments upon termination of the stable asset contract.
As previously mentioned, stable asset funds can be one of the most valuable investments during economic recessions or periods of stock market volatility. Unlike other investment returns, investment owners enjoy the agreed-upon interest rate regardless of economic conditions.
Stable asset funds can bolster a portfolio by providing balance and stability to offset more volatile investment decisions, such as investing in stocks and bonds.
Portfolio protection is another feature of stable asset funds. Stable asset funds can be underwritten by insurance companies and often enter into contracts with financial institutions to protect portfolios from unsustainable gains or losses that unpredictable interest rates often cause.
Unlike most money market accounts and some money market funds, many stable asset funds allow withdrawals and transfers daily with no penalties, fees or surrender charges.
Although the initial objective of a stable asset fund is to protect the value of its investments, its secondary objective is to return higher rates of earning than a money market fund might, provided funds are left alone. For example, while there have been brief periods of money market outperformance over the last 20 years, on average, stable asset funds have significantly outperformed money markets over that period of time. This makes a stable asset fund an appealing investment option for those looking to retire within the next decade.
Stable Asset Fund Education: The Key ToSmarter Plans
Familiarity should not be the primary tactic in choosing an investment fund. Despite this rationale, a lack of awareness about stable asset funds is often the deciding factor in a retiree’s choice not to invest in one. It is up to financial advisors to fill that educational gap. In doing so, you will help your clients make meaningful choices about their retirement while simultaneously bolstering your own status as a reputable source of counsel.
While money market funds have previously worked as quality retirement investment options, the increased returns, liquidity and stability that stable asset funds provide are most likely a better choice for those nearing the end of their careers. The result is a solution that can help bolster plan participants’ retirement balance and prepare them for whatever the future may bring.