The majority of Defined Contribution (DC) plans have historically used a money market or stable value fund as their primary capital preservation vehicle.

Persistently low interest rates following the 2008 Financial Crisis coupled with money market reform in October 2016 led many plan sponsors to review their capital preservation options. While money market funds remain a prevalent option today, it may be worth considering the following:

• Money market and stable value funds similarly seek to provide daily participant liquidity and regular income while seeking to offer a stable NAV.
• Because they benefit from the generally positive slope of the yield curve and have access to a broader set of securities than money funds, stable value funds have typically offered a return comparable to an intermediate bond fund. As a result, stable value funds have historically outperformed money market funds.
• As the Federal Reserve raised interest rates in 2017 and 2018, stable value’s yield advantage narrowed. However, based on the current backdrop and the recent Fed interest rate cuts, this spread will most likely return to the traditional 150-200¹ basis point range for the foreseeable future.
• Using stable value may lead to a meaningfully better retirement outcome versus money market funds over a participant’s investment horizon.

Summary

An evolving crisis and dynamic market environment may have immediate implications for money market funds.

As a result, we encourage DC plan sponsors and advisors to re-evaluate their options and consider the merits of stable value funds.