Consider stable value funds for DC plans

Kevin Calabro, Investment Director, and Stephen Horner, CFA, Portfolio Manager, 08/13/21


While all aspects of a retirement plan need careful attention from plan sponsors, choosing the appropriate capital preservation option can be especially challenging. The options available to plans differ greatly and regulations surrounding money market options have become more complex since SEC reforms in 2016.

We like to help sponsors navigate these important choices. As experts in a variety of capital preservation strategies, we can help sponsors understand the differences in options.

Below we offer a video with Portfolio Manager Steven Horner that describes some of the key differences between the options, along with a performance comparison updated through the Covid-19 pandemic.

Putnam's Steven Horner, CFA, explains why stable value funds can pursue smoother performance

Comparing performance of capital preservation options — including during the Covid-19 pandemic

Over the long term, from 1987 through 2021, stable value funds have demonstrated a performance advantage over money market funds. This advantage is due to several factors, the most important being that stable value funds can invest in both short- and intermediate-maturity securities. In most market environments, intermediate-maturity securities offer higher expected returns than the universe of money-market-eligible securities. This key differentiator can be more or less advantageous, depending on the interest-rate environment.

As shown in the graph below, money market funds closed the performance gap in 2017 and 2018 as the Fed tightened policy. When the Fed cut rates in 2019 and dropped them to zero in 2020 as an emergency response to the Covid-19 pandemic, the advantage for stable value crediting rates over money market yields began to widen again.

Stable value funds vs. money market funds (rolling 5-year returns), 1987–2021

Performance of capital preservation options

Source: Putnam.

What's more, the volatility profile of stable value funds has historically been lower than money market funds and much lower than intermediate-term bonds.

SEC reforms drove many plans to government money market funds

In 2016, the U.S. Securities and Exchange Commission completed reforms to the regulations that govern money market mutual funds. Under these new rules, both prime retail and institutional funds can impose liquidity fees and/or redemption gates under specific circumstances. Government money market funds, which invest 99.5% of portfolio assets in government securities, are exempt from these new regulations.

In the wake of the reforms, many investors chose to move assets to government money market funds from prime funds. DC plans, for example, found that the reforms made using prime money market funds nearly impossible because of the operational complexities required for plan recordkeepers. Many plan sponsors chose government money market funds instead and still hold those options.

We believe that DC plan sponsors might want to give stable value funds a deeper review. With a mix of smoother returns and outperformance in most market environments, these funds are often the better choice for a retirement plan.

Stable value funds offer an attractive combination of features

Stable value funds offer an attractive combination of features


Learn more!

We describe our approach to capital preservation on our How We Invest page, and offer product information about Putnam Stable Value Fund.

You can also download FAQs and Three reasons to consider Putnam.