Executive Summary
- The shift from a zero-interest-rate environment to one with higher yields and greater inflation uncertainty makes capital preservation choices much more significant for long-term retirement outcomes.
- Stable value funds are essential for retirement plans as they can potentially provide the two outcomes plan participants seek for capital preservation: the price stability of cash with the inflation-beating returns of bonds.
- As stewards of their employees’ retirement savings, we argue that plan sponsors should revisit their capital preservation options to make sure they deliver the outcomes their plan participants need to pursue their retirement objectives.
Introduction
As investors navigate an ever-changing economic environment, they require long-term investment choices to help safeguard their principal and deliver returns that outpace inflation over time. All employer-sponsored retirement plans need such a “confidence option”—an investment choice that enrollees believe is secure but still provides plan participants with positive real inflation-adjusted returns. This is especially true for seasoned participants whose primary concern may be to protect career-long savings from the erosive effects of inflation. Most plan sponsors offer such “capital preservation” options, typically a money market fund, stable value fund, and/or a short-term bond offering.
This paper discusses how the capital preservation landscape has evolved over time and demonstrates why including a stable value option, even if a plan already offers a money market or short-term bond fund, helps fulfill a plan sponsor’s fiduciary obligation to provide participants with the best possible long-term investment choices for capital preservation.
Capital Preservation Matters
The need for robust capital preservation solutions has become paramount in an investment landscape that is characterized by both higher interest rates and inflation uncertainty. Stable value funds, with their structural advantages and ability to deliver inflation-beating yields with low volatility, are a compelling option to address the evolving demands of retirement plan participants.
For plan sponsors concerned with meeting their fiduciary responsibility, the need to provide bond-like returns with low volatility makes stable value an attractive risk-return proposition. Essentially, stable value investors enjoy returns similar to short-term bond funds but with steady returns that eclipse inflation over the long term.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Stable value funds seek capital preservation, but there can be no assurances that they will achieve this goal. Stable value funds’ returns will fluctuate with interest rates and market conditions. The funds are not insured or guaranteed by any governmental agency. Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses.
Government money market funds typically invest at least 99.5% of the fund’s total assets in cash, US government securities and repurchase agreements. You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Interest rate increases can cause the price of a money market security to decrease. A decline in the credit quality of an issuer or a provider of credit support or a maturity-shortening structure for a security can cause the price of a money market security to decrease.
Retail money market funds: You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The fund’s sponsor is not required to reimburse the fund for losses, and you should not expect that the sponsor will provide financial support to the fund at any time, including during periods of market stress.
Past performance is no guarantee of future results.
Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.
Franklin Templeton, its affiliates and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax professional.
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