Stable Value Funds: A Safe Investment Option For Families

Stable value funds are a type of investment option available in 401(k) plans and other defined contribution plans, as well as some 529 or tuition assistance plans. They are designed to provide capital preservation and predictable, steady returns with low risk. These funds are typically insured bond portfolios, protecting investors against a decline in yield or a loss of capital. The funds invest in high-quality, short- to intermediate-term fixed-income investments and are often wrapped in insurance contracts to guarantee the investor's principal and agreed-upon interest rate. With stable value funds, investors can expect steady returns and low volatility, making them a popular choice for conservative investors and those nearing retirement.

Capital preservation

Stable value funds are a type of mutual fund that invests in high-quality, short- to intermediate-term fixed-income investments, typically government and corporate bonds. The distinguishing feature of these funds is that they maintain a constant $1 share price net asset value (NAV). This is achieved through insurance contracts that wrap the underlying fixed-income investments, allowing the fund to use book-value accounting and maintain a stable share price.

The insurance component of stable value funds protects investors from a decline in yield or a loss of capital. This insurance is provided by banks or insurance companies, which are contractually obligated to protect investors from any loss of capital or interest. As a result, stable value funds are considered a safe investment option, similar to money market funds but with slightly higher returns.

In addition to capital preservation, stable value funds offer predictable returns and are designed to provide stability to an investor's portfolio. They are well-suited for those seeking to minimize volatility, particularly individuals nearing retirement or already in retirement. By investing in stable value funds, individuals can preserve their principal while still generating steady returns.

While stable value funds prioritize capital preservation, it is important to note that they are not entirely risk-free. These funds typically have lower returns compared to stock funds and may carry higher fees due to the insurance component. Additionally, stable value funds may have limited availability, primarily offered in defined-contribution plans such as 401(k) plans and some 529 tuition savings plans.

Predictable returns

Stable value funds are designed to provide predictable returns and preserve an investor's capital. They are a type of investment available in 401(k) plans, other defined-contribution plans, and some 529 or tuition assistance plans. These funds are often marketed under names that indicate their nature, such as "capital preservation fund", "fixed-interest fund", or "income fund".

Stable value funds are considered a low-risk investment option. They are typically composed of high-quality, diversified fixed-income portfolios that are protected against interest rate volatility by contracts from banks and insurance companies. The funds invest in high-credit-rating bonds, typically AAA and AA, and then "wrap" them with contracts issued by banks and insurance companies that smooth out the returns of the underlying portfolio of bonds. This "wrap" protects the fund in times of market volatility by smoothing out the losses and gains of the underlying investments over the duration of the fund.

Stable value funds have a level of risk and stability similar to that of money market funds but tend to generate higher returns. They have historically outperformed both money market funds and the rate of inflation, making them a popular capital preservation option. During the 2008 financial crisis, stable value funds were one of the few 401(k) investments that produced a positive return, ranging between 3 and 5 percent.

The predictable returns of stable value funds are facilitated by the insurance contracts that wrap the underlying fixed-income strategies. This allows the funds to use book-value accounting, maintaining a stable share price. The insurance contracts enable plans to hold the assets supporting the contract at "book value", allowing securities to be held at the price paid for them, plus interest determined by a crediting rate formula included in the contract, regardless of market value. These contracts provide daily liquidity for participants to transact at book value, regardless of the current market value of the assets.

The crediting rate is the return that plan participants can expect after expenses. It is reset periodically and is based on the market value, book value, yield-to-maturity, and duration of the underlying assets. The stable value fund's "smoothing" of returns protects investors from mark-to-market losses resulting from rising interest rates. Over time, the market-to-book ratio should return to "par" (100%).

Low risk

A stable value fund is a portfolio of bonds that are insured to protect investors from a decline in yield or a loss of capital. They are considered a low-risk investment option, ideal for conservative investors, those with low-risk tolerances, and workers nearing retirement.

Stable value funds are a common feature of retirement plans, such as company 401(k) plans, and are designed to preserve capital and provide predictable, steady returns. They are often marketed under names that indicate their nature, such as "capital preservation fund", "principal protection fund", or "income fund". These funds are structured in various ways but are generally composed of high-quality, diversified fixed-income portfolios that are protected against interest rate volatility by contracts from banks and insurance companies.

The funds invest in high-quality, short- to intermediate-term bonds, which are then "wrapped" with insurance contracts that guarantee the investor receives their principal and agreed-upon interest rate, regardless of the market value of the assets in the portfolio. This insurance feature ensures stability, as the funds do not grow over time but also do not lose value. The insurance also means that stable value funds are nearly as safe as money market funds but tend to offer higher returns.

Stable value funds are a good choice for those seeking to minimise volatility, especially those nearing retirement or already retired, as they provide a way to preserve wealth with little risk of significant loss. They are also useful for those looking to stabilise their portfolio during times of market volatility.

Insurance contracts

Stable value funds are a type of investment portfolio that consists of high-quality government and corporate bonds. They are insured to protect investors against a decline in yield or a loss of capital. This insurance is provided in the form of contracts from banks and insurance companies, which are contractually obligated to protect investors from any loss of capital or interest.

Insurance company stable value contracts are a type of insurance contract that is used in stable value funds. These contracts are group annuity contracts under state insurance law, and they are regulated by individual state insurance commissions. The goal of this regulation is to protect the interests of the policyholder. In the event of an insurer's insolvency, state law provides more favourable treatment for claims made against the insurer by policyholders than for other unsecured claims.

There are several types of insurance company stable value contracts:

• General account guaranteed interest contracts (GICs): These are group annuity contracts that integrate a benefit-responsive guarantee with a promise to pay, backed by the claims-paying ability of the insurer's general account. GICs are similar to unsecured corporate bonds but have more favourable credit characteristics due to the priorities of the insurance insolvency regime. They have a higher credit quality than unsecured bonds issued by the same insurance company as GICs are ranked as policyholder claims in the event of insolvency.
• General account wrap contracts: These are similar to GICs but do not have a maturity date, and rates are reset periodically (quarterly, semi-annually, or annually).
• Separate account participating stable value contracts: These contracts are ERISA plan assets for ERISA plan investors. The investment performance of the separate account flows immediately to the plan and over time to the accounts of participants through the operation of the contract's crediting rate formula.
• Separate account non-participating stable value contracts: These are similar to separate account participating stable value contracts but do not participate in the investment experience of the insurer or the withdrawal experience of the plan. The original guaranteed rate continues despite the timing or amount of participant withdrawals.

The typical stable value fund will diversify contract protection by investing in more than one type of contract and/or with multiple insurance companies or banks.

Retirement plans

Stable value funds are a common option in some retirement plans, such as company 401(k) plans, and are especially aimed at savers nearing retirement. They are also available in other defined contribution plans, such as 529 or tuition assistance plans.

Stable value funds are a type of investment fund that offers principal preservation and predictable returns. They are a portfolio of high-quality, short- to intermediate-term bonds that are insured to protect investors against a decline in yield or a loss of capital. The insurance guarantee means that owners of stable value funds will continue to receive agreed-upon interest payments, regardless of the state of the economy.

Stable value funds are a conservative investment option that provides steady income with little risk. They are ideal for those seeking low-volatility investments and are a good choice for those with a low-risk tolerance. The funds are also suitable for those who want to stabilise their portfolio during times of market volatility.

While stable value funds are a safe investment option, there are some disadvantages to consider. The funds often carry lower yields and higher fees than other investments. The insurance wrappers that guarantee investors' principal come at a cost, which can eat into profit margins. Additionally, stable value funds may be subject to inflation risk, meaning that the fund may not be able to keep pace with inflation, resulting in a loss of purchasing power for the investor.

Overall, stable value funds can be a valuable component of a retirement plan, particularly for those seeking capital preservation and stable returns.

Frequently asked questions