Over 80% of U.S.-defined contribution plan sponsors offer stable value funds. In their default retirement fund lineup. According to 2022 data from MetLife.
I have yet to meet with an individual 401(k) investor who can explain a stable value fund. Or use it to preserve their 401(k) principal.
Stable value funds are a portfolio of bonds. Backed by some insurance guarantee. Stable funds have a protective insurance element.
The bonds in stable value fund have an agreed-upon interest rate. Most times these bonds are insured by a guaranteed investment contract (GIC). And mature over a specified time frame. These factors allow for the preservation of principal.
If the bonds in a stable value fund are held to maturity, there is very little risk of principal loss. No matter the volatility of the bond market. The insurer or bank guarantees a stable return of interest payments. Without the loss of principal.
Every dollar invested in a stable value fund never loses value. Unlike a traditional bond invested in a bond fund or target date fund. Traditional bonds face interest rate risk.
When interest rates rise, the value of traditional bonds goes down.
Stable value funds are indeed stable like the name suggests. Stable value funds offer a guaranteed investment return and principal preservation.
Like all 401(k) mutual fund options. Investors need to be very aware of all annual fees and charges. There is a cost associated with guaranteed insurance wrappers in a stable value fund. Annual fees of up to 1% are common in the many stable value funds.
Stable value funds will never compete with stock market mutual fund investment returns. But they will not lose value.
Inflation risk is also a consideration in a stable value fund. A stable value fund has the possibility of not being able to keep pace with inflation. That means an investor can lose purchasing power due to the decrease in value of their money.
One last caution on a stable value fund. Don’t confuse them with the money market account option on your 401(k) menu.
The differences between a stable fund and a money market fund are significant.
Stable funds are low-risk investments. That pays higher interest rates than you would receive in a money market fund. A money market fund is invested in cash instruments for very short durations.
Stable value funds offer higher interest rates than money market funds. Without added risk to 401(k) principal.
Over the last few months, the risk-reward of stock market mutual funds has not been in favor of a 401(k) investor. Now may be a good time to consider a stable value fund 401(k) investment. For at least part of your 401(k) account value.
Ric Lager
Lager & Company, Inc.
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