During a panel discussion at the RPAS West conference last month, an adviser in the audience directed a question to me: “My plan sponsors are asking me why they should choose stable value investments over money market funds. How can I convince them to stay the course with stable value?”
From my perspective, the question couldn’t have been more timely or relevant. Historically, stable value investments have outperformed money markets year after year in retirement plans. But 11 consecutive fed fund rate hikes since March 2022 have flipped the script, so that money markets are outperforming stable value — at least for now. Hence the dilemma of staying the course with stable value vs. being drawn to the current rate appeal of money market funds.
In this situation, here are a few key things I would have advisers say to plan sponsors:
1. Yield curve inversions are anomalies. Review the history — only six inversions have occurred over the last 45 years and all reverted back.
2. It’s risky to make a choice based on short-term Fed actions. Money market funds rates shadow federal fund rate moves almost identically — as rapid as the rise so could be the fall. And tied to Fed actions, money market rates are more volatile. Let’s also not forget recent history on prolonged zero percent interest Fed policy with money market rates languishing for nearly seven years.
3. Long-term returns matter. A decision to swap out stable value for money market funds would be trading the potential for steady long-term growth for momentary gains. as the chart below illustrates, the return on a dollar invested in stable value in 1988 would have been more than double that of a dollar held in money market funds.
4. Retirement investing is not a sprint. It’s a marathon spanning decades where slow and deliberate matters. Money markets are short-term debt instruments, aka "cash,” and often used to meet anticipated near-term liquidity needs. With durations, typically, of six months and shorter they are generally less suited to the long-term investment horizon of retirement plans as a core portfolio holding.
5. So why are stable value returns higher over time? They’re higher for the same reason bond funds provide higher returns than money market funds in a normal yield market where it costs more to borrow longer. Stable value steps in as a hybrid of both — combining low volatility and stable NAV (net asset value) similar to cash, but with the help of insurance wraps, able to invest longer to earn bond-like returns. And if rates continue to rise, stable value will eventually catch up with the lag.
Of course, no one can predict when stable value and money market returns will revert to historical norms, nor should anyone try. Also, terminating a stable value fund will come at a cost to the plan in the current market environment.
Moving money back and forth between stable value and money markets according to where the winds are blowing is really just another name for market timing. And that, as we know, is rarely a good idea.
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