The Safe Investment Choice in Your 401(k) Plan
Stable Value Funds Are a Fixed-Income, Low-Risk Option
You may have an investment option available in your 401(k) plan that you've never considered using, but should. It goes by many names: stable value, fixed income fund, guaranteed investment contract (GIC), capital preservation fund, principal protection fund, fixed interest fund, guaranteed fund, or stable interest fund. All of these types of funds can be grouped under a category called stable value funds.
Stable Value Funds
Stable value funds are composed of investment contracts issued by banks and insurance companies. Each investment contract pays a specified rate of return for a specified time.
It is an investment option that is only available within tax-qualified plans, meaning that you cannot purchase this investment in an IRA account or your brokerage account, nor will you find a stable value mutual fund that you can buy outside of your company retirement plan.
The objective of stable value is to preserve your capital and provide liquidity while delivering returns comparable to those of short- or intermediate-term bonds, but with less volatility.
A Low-Risk Option for Your 401(k)
Stable value is considered a low-risk investment choice. Someone who is quite conservative might choose it for all of their money, whereas people who are concerned about stock market volatility might choose it for a portion of their money. It is a particularly appropriate choice for those who are within five years of their anticipated retirement date since it can provide a fixed income with greater returns than money market funds.
A Good Pick for Those Near Retirement
Let’s assume you are three years away from retiring. You have put together a retirement income plan that shows you that you will need to withdraw $30,000 in your first year of retirement.
If you invest that $30,000 in stable value now, you know it will be available to you when you need it. If the market is down between now and retirement, so what? You know the amount you need to withdraw is secure in a stable investment choice.
If you are going to use this option, your 401(k) plan provider must allow you to choose which investments to take withdrawals from. Some 401(k) plans make you take withdrawals pro-rata, meaning they must come proportionately from your various investment funds. That won't work for this method. To match your investments to your withdrawal needs, you must be able to pick what to sell when it comes time to take money out.
Even if your plan does not allow that, stable value funds can still add stability to your portfolio, and the closer you get to retirement, the more stability you want.
Other Uses for Stable Value
You can use stable value as an opportunity fund: As your growth investments (equities) go up, take the profits and move them into stable value. Then, when the equity market goes down, you can move money from stable value back into growth.
However, there is no guarantee this approach will deliver returns any greater than what you'll get following a strategic asset allocation model. Many investors have made ill-timed decisions when attempting this.
Stable Value vs. Bond Funds
For those who will need to make withdrawals soon, the advantage of stable value over a short- or intermediate-term bond fund is lower volatility. In other words, a good return on your investment is the return of your investment. As you get closer to the time you will be taking withdrawals, protecting yourself from loss becomes increasingly important.
It would be great if you could buy individual bonds or certificates of deposit (CDs) inside your 401(k) plan, as those investments secure your principal and you could use them to create an income ladder or bond ladder. But since those choices are not available in a 401(k), then stable value becomes an ideal alternative.