One year after the SEC’s money market fund reform rules went into effect, there appears to be a sizable shift away from MMFs towards stable value funds as a capital preservation option in DC plans.
Just over half of plan sponsors (52%) now offer MMFs as a capital preservation option, down from 62% in 2015, while 9% of sponsors have added stable value funds to their plans in the past two years, according to MetLife’s 2017 Stable Value Study.
The study notes that stable value is poised for growth in the coming years, likely driven by a decline in money market usage as a result of MMF reform, as well as by increased inclusion of stable value as a fixed income allocation in target date funds.
Plan sponsors also say that they favor stable value funds over MMFs as a capital preservation option, but when it comes to the actions plan sponsors took in the wake of MMF reform, there is a divergence between the changes they made to their capital preservation options and their advisors’ recommendations.
For example, among plan sponsors who are familiar with the MMF reforms, the study found that a strong majority (83%) feel that stable value is a more attractive capital preservation option for plan participants than MMFs, as do nearly all DC plan advisors surveyed. Moreover, even among plan sponsors familiar with the rules whose plans offer only a money market option, a majority (55%) think stable value is a better option.
Yet just 3 in 10 plan sponsors overall evaluated their use of money market funds as their plan’s capital preservation option in light of MMF reform, the study found.
Meanwhile, two-thirds of plan sponsors (67%) who offer MMFs in their DC plans say it was recommended to them by their advisor, but only 14% of advisors say they very often recommend them as a capital preservation option in a DC plan. In fact, the report emphasizes that the majority of advisors say they seldom (71%) or never (14%) recommend money market funds, and are more likely to recommend stable value, with 90% saying they very often recommend it.
The report notes that, since advisors almost universally report that they recommend stable value very often, it appears that plan sponsors may not be hearing and/or heeding their advisors’ recommendations, indicating a continuing need for education about the rule changes and the role stable value funds can play as a capital preservation option.
Another factor affecting the adoption of stable value may be plan sponsors’ perceptions of its performance. Just over half of plan sponsors (56%) are aware that stable value returns have outperformed money market returns over the past 15 years, while 84% did not know that stable value returns have exceeded inflation over that same period.
The report suggests that there is some good news regarding the perception of stable value’s performance. Seven in 10 plan sponsors believe that stable value will preserve its rate advantage over money market returns even if interest rates go up, and one-third who would consider eliminating MMFs in favor of stable value say they are motivated by stable value’s better rates. For those who include stable value in their DC plans, the leading reason for doing so is because it offers better returns than money market or other capital preservation options (43%).
The 2017 Stable Value Study is the fourth study that MetLife has commissioned to gain strategic insight into the current marketplace for stable value, a capital preservation option offered in DC plans. Greenwald & Associates and Strategic Insight conducted the research of plan sponsors, advisors and stable value fund providers between June and August 2017, with a total of 241 interviews completed among plan sponsors who offer a 401(k), 457 or 403(b) plan.