MetLife’s 2022 Stable Value Study Finds Growing Interest in Volatility Smoothing Solutions for Target Date Funds Among Plan Sponsors and Advisors
More than two-thirds of defined contribution (DC) plan sponsors are concerned about the impact of market volatility on retirees (70%) and plan participants within 10 years of retirement (67%), according to MetLife’s 2022 Stable Value Study. More than half (52%) are concerned about those more than 10 years away from retirement. The full report is available at metlife.com/stablevaluestudy.
“Market volatility remains a concern when it comes to participants’ retirement security,” says Tom Schuster, senior vice president and head of Stable Value and Investment Products with MetLife. “Having DC plan solutions that are designed to help mitigate the effects of volatility is critical – especially for those nearing or already in retirement, who typically have a lower risk tolerance and a limited time horizon to recover from market losses.”
Stable Value Still the Most Prevalent Capital Preservation Option
Stable value remains the most popular capital preservation option for plan sponsors. A large majority of DC plan sponsors (82%) offer stable value and nearly all DC plan sponsors (98%) say they are not planning to make any changes to their stable value offering. Over nine in 10 stable value fund providers (91%) say plan sponsors chose stable value because its returns are better than those of money market funds and other capital preservation options.
The use of money market funds has declined significantly since 2015, with less than half of sponsors (48%) offering money market as a capital preservation option today (down from 62% in 2015).
Volatility and Target Date Funds
There are currently more than $2 trillion dollars of retirement savings invested in Target Date Funds (TDFs). As TDFs increasingly dominate DC plan investments, stable value, with its ability to smooth out volatility, enables TDF providers to optimize the risk/return profile of their funds to fit the profile of the plan participants invested in TDFs.
There is great interest among advisors and plan sponsors in the potential of stable value to improve participant outcomes: 89% of plan sponsors and 97% of plan advisors would be interested if the TDF provider could utilize a solution, such as stable value, that generates net returns four times more than the cost associated with delivering those additional returns (e.g., 60 basis points enhanced net returns for a cost of 15 basis points) while keeping volatility constant. Eighty-six percent of plan sponsors and 94% of plan advisors favor a solution that could maintain comparable returns, net of fees, while reducing volatility by approximately 40%.
“While TDFs may provide a simplified experience for plan participants, plan sponsors need to take a closer look at how these funds address the potential impact of market volatility,” says Warren Howe, national director, Stable Value Markets. “In fact, the study found that nearly one in five plan sponsors (18%) are likely to say that it is very or somewhat common for plan participants to delay retirement due to experiencing market losses in their TDFs.”
“The volatility smoothing principles of stable value can also be applied in TDFs,” says Howe. “This includes both off-the-shelf TDFs and custom TDFs, which may offer a better opportunity to implement these strategies. These solutions can significantly lower volatility while maintaining returns or, conversely, enhance returns while keeping volatility constant.”
Although off-the-shelf TDFs are the most popular, interest in custom TDFs may be growing – 27% of advisors are considering recommending or constructing custom TDFs for their plan sponsor clients, and over half of plan sponsors without a custom TDF say they would consider a custom TDF based on their advisors’ recommendation.
“By embracing solutions such as stable value in TDFs, plan sponsors can take steps to address their concerns about the impact of market volatility for retirees and near-retirees,” says Schuster. “With access to these solutions in TDFs, participants can take a ‘set-it-and-forget-it’ approach to their retirement with the security that their savings are protected against volatility.”
About the Study
MetLife commissioned Greenwald Research to conduct surveys of plan sponsors, advisors and stable value fund providers, between June and October 2021. A total of 222 interviews were completed among plan sponsors who offer a 401(k), 457 or 403(b) plan. Assets under management for plans included in the study ranged from under $10 million to over $1 billion. Each respondent had to work for a company that offers a DC plan with TDFs or target risk options, offer a capital preservation option, and have at least a moderate amount of influence over decisions regarding stable value or related funds for their company’s defined contribution plan(s). Online surveys were also completed by 49 DC plan advisors and 11 stable value fund providers.
MetLife, Inc. (NYSE: MET), through its subsidiaries and affiliates (“MetLife”), is one of the world’s leading financial services companies, providing insurance, annuities, employee benefits and asset management to help its individual and institutional customers navigate their changing world. Founded in 1868, MetLife has operations in more than 40 markets globally and holds leading positions in the United States, Japan, Latin America, Asia, Europe, and the Middle East. For more information, visit www.metlife.com.
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