What Is a Stable Value Fund?
Stable Value Funds Can Be a Low-Risk Alternative to Bonds
A stable value fund is a conservative fund investment somewhat money market fund, but stable value funds are known to offer slightly higher yields than money markets, without too much additional risk. A stable value fund is an investment known for preservation of capital, so they retain the value of your cash, regardless of what the stock or bond markets are doing. It's low risk, but the return you get is low as well.
MetLife's 2017 Stable Value Study puts the level of U.S. investment into stable value funds at $750 billion. Approximately half of all 401(k) plans offer a stable value fund and some 529 college savings plans also offer this conservative type of investment. The low-risk nature of this type of investment provides stable, consistent returns that can help provide portfolios with additional diversification options in an overall asset allocation strategy.
It's All in the Wrap Contracts
Stable value funds invest in fixed income investments and wrap contracts or "wrappers" offered by banks and insurance companies. Wrap contracts generally guarantee a certain principal and interest rate of return, even if the underlying investments decline in value. So they offer even more protection from interest rate volatility than bonds because the rate of return remains stable, even when everything else is not.
This doesn't mean they never lose value. During the market turmoil of 2008, stable value funds declined in value slightly, another victim of the failure of Lehman Brothers and resulting credit crunch. But the losses were minimal compared to other markets. Compare stable value funds' return of around 4.2% in 2008 to the S&P's devastating -37% return over the same year.
The wrap contracts could potentially cause liquidity problems which aren't always easy to foresee. For example, if an employer has several employees leave the plan at once, the value of the assets in the plan could be impacted -- its book value could be compromised as compared to market value. Book value is the value of the contract or underlying investments; in this case, contributions plus accrued interest minus withdrawals from the account. The Stable Value Investment Association says that most of these events can be caught and adjusted against in advance.
Even a government committee looking at these funds in 2009 found such impacts to be rare.
Types of Stable Value Funds
Stable value funds are structured and managed slightly differently than common market funds and come in a few different types:
- Separately managed accounts: These are customized investment accounts designed to meet a specific goal for a single retirement plan. Returns are backed by assets in another account, and the returns can be fixed, indexed, or may adjust annually according to the performance of the market.
- Commingled funds: These types of funds combine assets from a variety of resources, just like a mutual fund. This helps smaller plans gain economies of scale.
- Guaranteed Investment Contracts (GIC): In the case of these accounts, the money manager invests in an annuity, and the investors in the retirement plan are the beneficiaries; so there is a guaranteed amount of principal and interest.
- Synthetic GIC: These accounts invest in a portfolio of fixed-income investments "wrapped" in insurance contracts that protect the underlying value of the investment. These make up a good percentage of today's stable value funds.
Stable value funds are overseen by laws set up by the Financial Accounting Standards Board, the Government Accounting Standards Board and the Department of Labor's Employee Retirement Securities Act (ERISA). Commingled funds are also regulated by the SEC.
What Should Consumers Look for in Stable Value Funds?
Stable value fund investors should look primarily for funds that don't cost much. Generally, a fairly priced stable value fund will charge fees of less than 0.50%. Be wary of stable value funds charging 1% or more. It's important to weigh the cost against any potential benefit.
Wise investors educate themselves regarding fund withdrawals or redemptions. Participants in stable value funds are not subject to any waiting periods of surrender charges, but a provision may exist which prevents you from moving funds from a stable value fund to another type of fund. Waiting periods of up to 90 days may exist as well.
Know that no investment comes without risk. Such risks could involve the credit quality of the company running the fund, the insurer offering the "wrapper," or a substantial company investing in the fund. Your 401(k) plan administrator should do the research here, but it's always a good idea for consumers to be informed as well.
Disclaimer: The content on this site is provided for information and discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.