Employees of all age groups have trouble making educated choices about investing in their retirement plan, but millennials often face some unique challenges as compared with other generations.
Because of this group’s age range, millennials aren’t all in the same stage in life. Some are pursuing higher education, some are starting their first jobs and others are climbing the corporate ladder. In addition, a large portion of millennials still have student loan debt. This can influence their retirement savings decisions and impact their ability to save adequately in the long run.
Contributing to a defined contribution plan now, even in small amounts, can create larger earnings over time. But when it comes to investing, millennials tend to be more risk-averse than their parents. The reasons range from experiencing an economic recession to saving to buy a home or a host of other factors. Given the growing number of millennials in today’s workforce, now can be a great time to talk to clients in this age bracket about adding a low-risk investment product — stable value funds — to their defined contribution plans.
The Principles Of A Stable Value Fund
Because stable value funds are designed for investors who are looking for a retirement plan with a guaranteed return of principal and interest, along with competitive crediting rates and liquidity, they are inherently less risky than many other investment options.
Many stable value funds also have locked-in quarterly interest rates, so the investment is more stable than an investment tied to an individual business or stock. As you make the case for clients to consider stable value funds, highlight how these three unique product benefits can be attractive to millennial employees:
1. Capital Preservation
Depending on the carrier, a stable value fund’s crediting rate typically is contractually guaranteed and known to a client in advance. The rate is often locked into place every quarter or at least semiannually. Some insurers even guarantee that the crediting rate will never fall below 1%. This level of certainty may be what it takes to assure millennials their hard-earned savings will be protected.
Explain to millennial plan participants that they’re at an ideal age to capitalize on the guaranteed crediting rate because the longer the fund is invested, the more time the investment has to grow. In most cases, millennials will be working for at least two more decades, providing a reasonable time frame to accrue a sizable sum for retirement.
After a millennial plan participant becomes more comfortable with investing in general, they may then ultimately decide to switch at least some of their investments to riskier assets. Stable value funds offer the flexibility to do that. Liquidity can give millennials the comfort of knowing they have the freedom to move their money to other investments whenever they want. There are generally no restrictions or penalties for the individual investor.
Holding steady through marketplace volatility, stable value funds serve as a low-risk investment vehicle that provides a guaranteed yield — no matter what. The product can provide the liquidity and principal-protection features of money market products but with the higher yields that are comparable with intermediate-term bonds.
Stable value funds are backed by a high-quality, well-diversified portfolio of fixed-income options. These types of diversified investments can protect investors from the market fluctuations that are experienced in higher-risk investments, such as the stock market. Millennial employees may feel reassured to hear that if we experience another economic recession, their hard-earned money would not take a hit.
Stable Value Fund Education: The Key To Smarter Plans
A lack of awareness about stable value funds is often the deciding factor in an employee’s choice not to invest in one. It is up to financial advisors to fill that educational gap. By doing so, you will help plan participants make meaningful choices about their retirement while boosting your own credibility.
Many employers may also be new to stable value funds, so it’s important to explain the product structure in a way that’s easily digestible. Here’s a one-sentence overview: Stable value funds are a relatively low-risk asset class that focuses on capital preservation while providing steady, positive returns to employees in qualified and nonqualified retirement plans. And here’s how you can summarize the benefits: The product can offer employees the liquidity and principal-protection features of money market products, but with the higher yields that are comparable to intermediate-term bonds.
Getting Into The ‘Millennial Mindset’
As you prepare to meet with clients and discuss how to reach this demographic, first get yourself into the millennial mindset. Whether you are a millennial, have millennial children or work with millennials as colleagues, you know that student loan debt can be a source of financial stress. The thought of owing a large sum of money and the amount of time it can take to pay it off can be overwhelming. Being mindful of the sensitivity around this issue can help you craft your conversations about retirement savings best practices.
When possible, provide real-life examples to demonstrate how stable value funds can offer millennial employees a safe and profitable investment vehicle for their hard-earned money. Often, clients will take comfort in hearing you speak from experience about how others have benefited from adding this product to their plans. Additionally, highlight how starting to save early can help employees grow their savings over time with compounded interest. If a client is worried about market volatility, stable value funds offer a good way to get more stability with an appealing interest rate.
An important note to highlight is that during the 2008 economic crisis, stable value funds were among a select few retirement plan investments that earned a positive return. For employees who sold at the market bottom and therefore may still be digging out from losses they incurred during the Great Recession, this investment security could be especially appealing.
Retirement readiness will continue to be an increasingly important concern among millennials in the coming years. As a result, plan sponsors and employees are looking to their financial advisors to recommend products that will help set them on a solid path, such as stable value funds. The capital preservation, liquidity and yield that stable value funds provide can be a great choice for millennials in nearly any stage of their career. These product benefits can help boost employees’ retirement balance and prepare them for whatever the future may bring.
What Is Stable Value?
Stable value is an investment vehicle offered by defined contribution plans and used by participants.
Stable value provides the following unique combination of benefits:
•Stability and steady growth in principal and earned interest.
Returns similar to intermediate bond funds with the liquidity and certainty of money market funds.
•Benefit-responsive liquidity, which means participants transact at contract value (principal plus accrued interest).
Stable Value Funds Are Used In Defined Contribution Plans
Stable value funds are a core investment in defined contribution employee benefit plans:
$839 billion invested in stable value assets.
179,000 defined contribution employee benefit plans.
Offered in approximately three-quarters of all defined contribution plans.
401(k) allocations to stable value funds have ranged between 17% to 37% over the life of the Aon 401(k) Index.