As we continue to navigate economic uncertainty, stable value’s volatility smoothing, capital preserving attributes make it a solid addition to the core investment lineup of tax-qualified retirement savings plans for which it was originally—and exclusively—designed. But stable value has evolved in recent years, resulting in greater flexibility in how these funds can be employed in a variety of investment scenarios. Today, stable value has become a key component in model portfolios, delivering value while adding stability to a variety of asset allocation structures.
About Model Portfolios
A model portfolio is a customized asset allocation strategy created and managed by professional investment managers typically invested in either Collective Investment Trusts (CIT’s), mutual funds, or exchange-traded funds (ETFs). Model portfolios employ a diversified investment approach to target a particular balance of return and risk or a specific portfolio objective.
The popularity of these prebuilt, yet customizable portfolios has grown across the retirement industry, offering advisors and plan sponsors an efficient, flexible and cost-effective way to diversify plan lineups and mitigate risk. For plan participants, model portfolios can offer a “one and done” approach, making it easier to get started and stay engaged in saving for retirement.
Advantages of Stable Value in Model Portfolios
Using stable value as the fixed-income component of model portfolios offers many advantages for advisors, plan sponsors and their participants, including:
- Capital preservation. Stable value is one of the most reliable capital preservation options available. Historically, this income-producing, low-risk investment option has consistently outperformed both money market funds and inflation while providing a guarantee of principal and interest.
- Lower correlation. Stable value returns are generally negatively correlated, meaning they have the least relationship with equity investments. So stable value protects retirement savings when equity markets slide.
- Reduced volatility. Stable value allows for an increase in returns while maintaining existing risk levels—or it allows you to reduce risk without reducing returns.
- Seamless integration. A stable value fund can be seamlessly integrated into existing asset allocation structures.
- Rebalancing. The ability to rebalance on a periodic basis supports the custom glide path that you’ve established.
- Accessibility. Stable value provides daily access to funds for participant-initiated activity.
In short, the same advantages that stable value offers as a capital preservation option in a plan’s core investment lineup can be experienced in models as well. And just as plan sponsors have trusted your advice on the selection of their core investment options, the significance of the choices you make in developing your models can enhance your value and strengthen your relationships.
As models continue to grow more popular in the DC retirement landscape, we’re here to assist you in choosing the strongest capital preservation option to include in your model portfolios.