“Cash is king” is an anecdotal refrain often heard in the world of investing. Generally, this statement refers to portfolio liquidity and the notion, all else equal, that the more liquid the portfolio the better, especially in times of market stress. This drives investment managers to seek the increased safety and flexibility of cash and cash equivalents despite relatively low returns. The stable value asset class is no different. In fact, one could argue that the need for liquidity in stable value funds today is perhaps now more imperative than ever.
Three broad trends have driven outflows from the stable value investments and the greater need for liquidity. First, aging American workers have shifted from contributions to withdrawals in 401(k) plans. Demographic changes in the American population began in earnest in 2011 when the first baby boomers turned 65 years and started to retire. The aging domestic population will continue to impact the defined contribution and 401(k) market as older plan participants enter retirement and begin to withdraw investments to fund living expenses. Typically the most conservative investment option offered within a defined contribution plan, stable value funds usually attract larger balances from older plan participants who are at or near retirement and serve as the primary source for withdrawals. These demographic realities have contributed to the consistent flow of participant-directed transfers out of stable value funds. Second, immediately following the global financial crisis of 2007 to 2009, equity returns took off. March 2009 signaled the start of an equity rally that has been practically uninterrupted for nine consecutive years. With the S&P 500 Index generating an average annual return of over 15% during this period, plan participants pursued those returns instead of the 2% to 3% performance generated by stable value funds, creating another source of transfer activity.