A stable value fund is a conservative fund investment, kind of like a money market fund. Yet 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. In other words, the funds 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.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 from bonds. The rate of return remains stable, even when everything else is not. That 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 that aren't always easy to forsee. For example, if an employer has several employees leave the plan at once, this could impact the value of the assets in the plan. This has to do with book value 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 for in advance. Even a government committee looking at these funds in 2009 found that such impacts were rare.Types of Stable Value Funds
A stable value fund may seem like mutual funds, but they are structured and managed slightly differently. They come in a few 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 combine assets from a variety of sources, just like a mutual fund. This helps smaller plans gain economies of scale.
- Guaranteed Investment Contracts (GIC): This is an account where the 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: The account invests 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.
Because they can be structured differently, stable value funds are regulated by various agencies. They are run by laws set up by 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?
Primarily, stable value fund investors should look for the fund that doesn't cost too 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. You have to weigh the cost against benefit.
You should also try to educate yourself about how fund withdrawals or redemptions work. Participants in stable value funds are not subject to any waiting periods of surrender charges. But there may be a provision that prevents you from moving funds from a stable value fund to a competing fund, or a short-term bond fund or money market fund. You may have to wait 90 days.
Know that the funds are not without risks. The 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 doesn't hurt for consumers to understand what plans are looking for.
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