Stable Value Funds: Conservative, but Not Without Risk
Stable Value Funds: Conservative, but Not Without Risk. Ah, the stable value fund. It’s been a core investment fund in most retirement plans for decades and often serves as the go-to option for conservative investors. That’s because stable value funds offer fairly predictable returns and guaranteed capital preservation.
Despite their low-risk reputation, there are a variety factors to consider when evaluating a stable value fund, according to a recent article from benefits solutions provider Strategic Benefits Services.
Here are some facts about stable value funds, a few benefits, and some risks to watch out for:
- Stable value funds are generally available in employer-sponsored retirement plans as low-risk investment options with a capital preservation component. Their portfolios are made up of high-quality, fixed income investments. Contracts with banks or insurance companies help protect against interest rate risk.
- Stable value funds are fairly popular. Besides equities (40% of assets) and target date funds (35% of assets), stable value funds (11% of assets) ranks third among all major asset classes in SBS participant-directed retirement plans.
- Stable value funds come in three varieties: traditional guaranteed interest contracts (GICs), separate account GICs, and stable value collective investment trusts (CITs). In traditional GICs, which are issued by insurance companies, participants’ assets are invested in the insurance company’s general account assets. Separate accounts are group annuity contracts issued by an insurance company, and instead of being part of its general account, the assets go into a separate account — hence the name. They are considered “safer” than traditional GICs because of how the asset payouts are structured should the issuer go bankrupt. CITs are basically mutual funds, but they’re not regulated by the Securities and Exchange Commission (SEC).
- Stable value funds offer steady, predictable returns. They help more conservative investors — particularly those approaching retirement — to preserve potential retirement income while minimizing risk. Due to these attractive features, stable value funds can help boost participation and deferral rates among risk-averse participants.
- Stable value funds typically offer a higher yield than money market accounts, which invest in bonds with shorter maturities and lower yields. Money market funds also don’t typically offer the guaranteed minimum interest features of stable value funds.
- Stable value funds offer a guarantee, from the issuer, that the principal investment will be returned. Keep in mind, however, these guarantees are backed by the issuer’s credit-worthiness and paying ability. So it’s important to keep tabs on the credit rating of your stable value fund issuer and any changes in the outlook for its stability or financial health.
- All investments come with some risk, and stable value funds are no exception. Although they are considered the lowest-risk option in a retirement plan’s investment menu, the underlying fixed income investments in a stable value fund are still subject to inherent risks, including interest rate and credit risk. And while bankruptcies among stable value fund issuers are rare, it is another risk to be aware of.
- Fees are determined by the stable value issuer and are generally expressed as a percentage of assets. Therefore, they are determined by your plan’s asset size.
It’s important to fully understand the benefits, features, and risks of a stable value offering before signing a contract with an issuer. As a retirement plan sponsor, it’s your job to ask the right questions, do your due diligence, and make sure the stable value fund option you select serves your participants’ best interests.
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