What Is a Stable Value Fund?

Value, highlighted
•••

samxmeg/Getty Images

A stable value fund (SVF) is a conservative fund investment option that's available only to participants in defined contribution plans, such as 401(k)s. It's similar to a money market fund, but an SVF is known to offer slightly higher yields than a money market fund without too much additional risk.

An SVF is an investment option that's focused on the preservation of capital, so it retains the value of your cash regardless of what the stock and bond markets are doing. It's low risk, but the return you get is low as well.

According to the Stable Value Investment Association (SVIA), $733 billion is invested in stable value assets, and about three-quarters of defined contribution plans offer a stable value option.

Wrap Contracts

Stable value funds invest in fixed-income securities and wrap contracts offered by banks and insurance companies. Wrap contracts generally guarantee a certain return even if the underlying investments decline in value. To support that guarantee, a wrap contract relies on both the value of the associated assets and the financial backing of the wrap issuer.

Loss of Value

It's possible for investors to lose money in SVFs, but that has happened only on rare occasions. In 2009, an SVF in a deferred-compensation plan for white-collar workers at Chrysler paid only 89 cents on the dollar when it was liquidated before the carmaker could begin bankruptcy proceedings.

And in December 2008, an SVF managed by Invesco for Lehman Brothers employees fell 1.7 percent in value after many former workers of the bankrupt Wall Street firm withdrew their money. To cover the withdrawals, the fund had to quickly sell bonds at a loss. The fund was still able to return 2.2 percent for all of 2008.

Finally, some SVFs managed by State Street Corp. would have experienced losses in 2008 if the company hadn't contributed more than $610 million to make the funds whole.

Types of SVF

Stable value funds come in a few different types, with the primary difference being the source and nature of the underlying assets.

  • Separately managed account: This type of plan is offered by an insurance company and is backed by assets in a segregated account held by the insurance company and, if necessary, by the insurer’s general account assets. The assets in the separate account are owned by the insurance company but are held only for the benefit of the retirement plan participants.
  • Commingled fund: This type of fund, also known as a pooled fund, is offered by a bank or other financial institution and combines assets from a variety of unaffiliated retirement plans. In that way, it can help smaller plans gain economies of scale.
  • Guaranteed investment contract (GIC): A GIC is issued by an insurance company and pays a specified rate of return over a given period of time. This kind of contract may be backed by the issuer’s general account assets or by assets held in a separate account. In either case, the insurance company owns the invested assets, and the obligation to participants in the plan is backed by the full financial strength and credit of the insurance company that issued it.
  • Synthetic GIC: This type of contract is similar to a regular GIC, but the associated assets are held in the name of the retirement plan or a trustee of the plan.

Small Fees

SVF investors should look primarily for a fund that charges small fees. Generally, a fairly priced SVF will charge fees of less than 0.5 percent. Be wary of funds charging 1 percent or more. It's important to weigh the cost against any potential benefit.

Know that no investment comes without risk. Such risks could involve the credit quality of the company running the fund, the insurer or bank offering the wrap contract, or a company that is substantially invested in the fund.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.