Society management

Growing interest in volatility smoothing solutions for TDFs

Although few target date funds currently include strategies to reduce volatility with the ability to enhance returns, which are stable value principles, there seems to be significant interest in features that can do both, according to MetLife’s 2022 stable value study.

If a TDF supplier could use a solution, such as a stablecoin, that could generate net returns four times the cost associated with providing those additional returns (for example, 60 basis point improved net returns for a cost of 15 basis points) while keeping volatility constant, 89% of plan sponsors and 97% of advisors would be interested in this feature, notes the study.

There is also considerable interest — 86% of plan sponsors and 94% of plan advisors — for a feature that could maintain comparable returns, net of fees, while reducing volatility by about 40%.

MetLife notes that more than $2 trillion in retirement savings are invested in TDFs, and as they increasingly dominate DC plan investments, stable value — with its ability to smooth out volatility — allows providers TDF to optimize the risk/return profile of their funds to match the profile of members invested in TDFs.

“While TDFs can provide a streamlined experience for plan participants, plan sponsors need to take a closer look at how these funds handle the potential impact of market volatility,” says Warren Howe, National Markets Director of stable value of MetLife. In fact, the study found that nearly one in five plan sponsors (18%) are likely to say it’s “very or somewhat common” for plan members to delay retirement due to market losses. in their TDFs.

The principles of stable value volatility smoothing can also be applied in TDFs, notes Howe. “This includes both standard TDFs and custom TDFs, which may provide a better opportunity to implement these strategies. These solutions can significantly reduce volatility while maintaining returns or, conversely, enhance returns while keeping volatility constant,” he suggests.

Although standard TDFs are the most popular, interest in custom TDFs may grow. According to the results, 27% of advisors would consider recommending or creating personalized TDFs for their plan sponsor clients, and more than half of plan sponsors without a personalized TDF say they would consider a personalized TDF based on the recommendation. to advise them.

Volatility and preservation

When plan sponsors were asked about their level of concern about DC plan participants’ ability to mitigate the impact of market volatility, many expressed concern, particularly among those who are already retired or who are nearing retirement.
In fact, more than two-thirds of DC plan sponsors are concerned about the impact of market volatility on retirees (70%) and plan members within 10 years of retirement (67%), according to the ‘study. More than half (52%) worry about those more than 10 years away from retirement.

Stable value remains the most popular capital preservation option for plan sponsors, notes MetLife. Most DC plan sponsors (82%) offer stable value and almost all DC plan sponsors (98%) say they do not plan to make any changes to their stable value offering.

Additionally, more than 9 in 10 (91%) of stable-value fund providers say plan sponsors chose stable-value because its returns are better than money market funds and other wealth-preserving options. capital, and nearly half say advisor recommendations (45%) are the main reasons. At the same time, the use of money market funds has dropped significantly since 2015, with less than half of sponsors (48%) now offering the money market as a capital preservation option, down from 62% in 2015, notes MetLife.

“By embracing solutions such as Stable Value in TDFs, plan sponsors can take steps to address their concerns about the impact of market volatility for retirees and near-retirees,” says Tom Schuster, Senior Vice President and Head of Stable Value and Investment Products at MetLife. “With access to these solutions in TDFs, participants can adopt a ‘set and forget’ approach to their retirement with the security that their savings are protected against volatility.”

MetLife commissioned Greenwald Research to conduct surveys of plan sponsors, advisors, and stable-value fund providers between June and October 2021. A total of 222 interviews were conducted among plan sponsors who offer a 401(k) plan. (k), 457 or 403(b). The assets under management of the plans included in the study ranged from less than $10 million to over $1 billion. Each respondent had to work for a company that offers a DC plan with TDFs or target risk options, offers a capital preservation option, and has at least moderate influence on stable value or related fund decisions. Online surveys were also completed by 49 DC plan advisors and 11 stable value fund providers.