Stable Value Funds

Just as the term implies, a Stable Value Fund attempts to maintain a constant price, or principal value, regardless of stock market or interest rate environments. These funds are typically found in company-sponsored retirement plans such as 401K’s, 403B’s, and the like. Stable Value Funds (also sometimes referred to as “Fixed Accounts” or “Fixed Income Accounts” in your retirement plan literature) typically offer interest rates that are 1 to 2% higher than ordinary money market accounts.

How Do Stable Value Funds Work?

Most SVF’s invest in what are known as Guaranteed Investment Contracts (GIC’s), Synthetic Investment Contracts (SIC’s), Bank Investment Contract’s (BIC’s), and other guaranteed or insured investment pools issued through banks, insurance companies and other financial institutions. These days, the majority of the investments tend to be in Synthetic Investment Contracts, which are basically pools of short-term bonds, packaged inside an insurance wrapper. If the interest crediting rate falls below the contractual rate set by the insurer, the insurance company pays the difference back to the fund. If the interest rates rise higher, then the insurance company pockets the difference.

Why Are They Useful?
Like an insured money market account, they provide some piece of mind that the price of the funds (known as the “Net Asset Value”) will not fluctuate – you can feel comfortable knowing that you likely won’t lose any principal. However, the downside of that insurance protection is that the interest rate will rarely exceed the rate of inflation. Currently, most Stable Value Funds are crediting interest in the range of 1-2%, with no prospects of rising in the near future.

Should I Invest in a Stable Value Fund in My 401K?
As said previously, the goal of these funds is to no lose money. Having said that, one should not expect to earn much return while invested in these funds.  They are suitable for investors with very low risk tolerance or who are currently preparing to make withdrawals from their portfolio, and do not want to risk losing principal on money earmarked to be withdrawn shortly. They are appropriate for the “cash” portion of your investment portfolio.

How Do I Get More Information About the Stable Value Fund in My 401K?
Since most Stable Value Funds are not publicly traded, you must seek information from your employer-sponsored plan. Most plans have online access to fund and investment information available to their employees.

If you are an employee or retiree of General Dynamics, Pfizer, or L&M Hospital, and you would like advice and direction on managing your Fidelity 401K or Hewitt 401K plan, please sign up for our monthly newsletter, which provides complimentary ongoing advice, commentary, and model portfolios for each of those plans. You can sign up automatically at http://www.lwmwealth.com/services/your401k.html.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with an added focus on the particular needs of women that are divorced or widowed. He is an Accredited Asset Management Specialist and a Certified Divorce Financial Analyst. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.