You may have an investment option in your 401(k) plan that you've never considered using, but should. This option is called stable value funds. Used the right way, they can be a low-risk way to preserve your capital when you're close to retirement.
These funds go by many names. You may see them called stable value, fixed income fund, guaranteed investment contract (GIC), capital preservation fund, principal protection fund, fixed interest fund, guaranteed fund, or stable interest fund. No matter what name they're under, types of funds can be grouped under a category called stable value funds.
What Are 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.
These funds are an investment option that you will only find within a defined contribution plan like a 401(k). That means that you cannot purchase stable value funds 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. Stable value funds give you liquidity while also giving returns that compare to those of short- or intermediate-term bonds. They also have less volatility than those choices.
A Low-Risk Option for Your 401(k)
Stable value is considered a low-risk investment choice. If you are quite conservative, you might choose it for all of your money. If you are concerned about stock market volatility, you might choose it for a part of your money.
It may be a good choice if you are within five years of your anticipated retirement date. This is because it can provide a fixed income with greater returns than money market funds.
A Good Pick for Those Near Retirement
For instance, let’s say that 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 after you retire.
If you invest that $30,000 in stable value now, you know it will be there 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. You will be a lot less worried about the chance that you'll lose your money before you need to access it.
If you are going to use this option, your 401(k) plan provider must allow you to choose from which investments to take withdrawals. Some 401(k) plans make you take withdrawals pro-rata. This means that 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. This makes them a solid choice for those approaching the end of their working life. 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.
But, there is no guarantee this approach will deliver returns any greater than what you'll get from a strategic asset allocation model. Many investors have made ill-timed choices when trying this. It's always risky to try to time the market.
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 more important. Stable value funds offer a way to safeguard your money as you approach the time in your life when you will need it the most.