A stable value fund is a conservative fund investment option; it's only available to participants in defined contribution plans, such as 401(k)s.
Learn more about how stable value funds work and the level of risk they involve.
What Is a Stable Value Fund?
A stable value fund (SVF) is an investment option that's focused on the preservation of capital. That means it retains the value of your cash, no matter what the stock and bond markets are doing. The risk is low, but the return you get is low as well.
It's similar to a money market fund. But an SVF offers slightly higher yields than a money market fund without too much added risk.
In 2018, more than $800 billion was invested in stable value assets; about three-fourths of defined contribution plans offered a stable value option.
Alternate names: Stable value funds are also called:
- Capital accumulation funds
- Principal protection
- Guaranteed funds
- Preservation funds
- Guaranteed Investment Contracts (GICs)
- Group Annuity Contracts
How Do Stable Value Funds Work?
Stable value funds invest in fixed-income securities and wrap contracts offered by banks and insurance companies. Wrap contracts often guarantee a certain return; this is true 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. Both banks and insurance companies can issue wrap contracts.
This means that your money should never be worth less than your initial investment in the fund. The company offering the wrap contract guarantees a certain return; this is no matter what happens to the economy at large. If for some reason, the fund does lose value, it is the responsibility of the wrap issuer to make the funds whole.
Stable value funds come with risk. But this is true of any investment. With SVFs, risks could involve the company running the fund or offering the wrap contract, or a company that is substantially invested in the fund.
Bankruptcy, credit quality, or other challenges to financial solvency for any of these participants can impact how stable your investment is.
It's possible to lose money in stable value funds. But that has happened only a few times. In 2009, an SVF in a deferred-compensation plan for workers at Chrysler paid only 89 cents on the dollar when it was liquidated before the carmaker could begin bankruptcy proceedings.
In December 2008, an SVF managed by Invesco for Lehman Brothers workers fell 1.7% in value. This was 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 about 2% for all of 2008.
Some SVFs managed by State Street Corp. would have had losses in 2008 if the company hadn't contributed more than $610 million to make the funds whole.
Types of Stable Value Funds
Stable value funds can take a few different forms. The differences between them are the source and nature of the underlying assets.
Separately Managed Account
This type of plan is offered by an insurance company. It is backed by assets in a segregated account held by the insurance company and, if needed, by the insurer’s general account assets. The assets in the separate account are owned by the insurance company. They are held only for the benefit of the plan participants.
This type of fund is also known as a pooled fund. It is offered by a bank or other financial institution. It 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; it pays a certain rate of return over a given length of time. This kind of contract may be backed by the issuer’s general account assets. Or, it could be backed by assets held in a separate account. In either case, the insurance company owns the assets. The obligation to those in the plan is backed by the full financial strength and credit of the company that issued it.
This type of contract is similar to a regular GIC. But the assets are held in the name of the retirement plan or a trustee of the plan.
How Much Are Stable Value Fund Fees?
Investors should look for a stable value fund that charges small fees. In most cases, a fairly priced SVF will charge fees of less than 0.5%.
Be wary of funds charging 1% or more. These fees can eat into the low returns that a stable value fund provides.
- A stable value fund (SVF) is a conservative fund investment option. It's only for those in defined contribution plans, such as 401(k)s.
- SVFs are focused on the preservation of capital; it retains the value of your cash no matter what the stock and bond markets are doing.
- Stable value funds invest in fixed-income securities and wrap contracts offered by banks and insurance companies.
- A stable value fund is similar to a money market fund. But it offers slightly higher yields without too much added risk.
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.