What is a stable value fund?

A stable value fund is a low-risk investment similar to a money market fund. It invests in wrap contracts that provide a guaranteed return.

Definition and Example of a Stable Value Fund

A stable value fund is a conservative investment option, focusing on preserving capital. This means it maintains the value of your money, regardless of what happens in the stock and bond markets. The risks are low, but the return is also low. It is only available to participants in defined contribution plans such as 401(k) plans.

Alternative names: Stable value funds are also called:

• Capital accumulation funds
• Capital protection
• Guaranteed funds
• Preservation funds
• Guaranteed investment contracts (GICs)
• Collective investment contracts

For example, a company or government agency may offer a stable value fund as one of the options for employees to invest their money from a 401(k) or 403(b) plan. It may not provide employees much growth for their retirement funds, but it will ensure that none of the money they invest is lost.

A stable value fund is similar to a money market fund but provides slightly higher returns than a money market fund without adding significant risk.

How Does a Stable Value Fund Work?

Stable value funds invest in fixed-income securities and wrap contracts provided by banks and insurance companies. Wrap contracts often guarantee a certain return, even if the underlying investments decline in value.

To support this guarantee, wrap contracts rely on the value of the associated assets and the financial backing of the entity issuing the wrap. Banks and insurance companies can issue wrap contracts. This means that your money will not be worth less than the initial investment in the fund. The company offering the wrap contract guarantees a certain return, regardless of what happens to the economy in general. If the fund loses value for any reason, the liability falls on the issuer of the wrap contract to make up the funds.

Be cautious of funds that charge fees over 1%. These fees can eat into the low returns provided by the stable value fund.

Stable value funds come with risks, like any investment. Risks can relate to the company managing the fund or providing the wrap, or to a company significantly invested in the fund.

Bankruptcy, credit quality, or other financial challenges for any of these participants can affect how safe your investment is.

It is possible to lose money in stable value funds, but this has only happened a few times. In 2009, a stable value fund in the Chrysler Corporation’s deferred compensation plan only paid 89 cents on the dollar when it was liquidated before the automaker filed for bankruptcy.

In December 2008, a stable value fund managed by Invesco for Lehman Brothers employees fell by 1.7% in value. This happened after many former employees of the failed banking firm withdrew their money. To cover the withdrawals, the fund was forced to sell bonds quickly at a loss. The fund was able to return about 2% for all of 2008.

Some stable value funds managed by State Street Corp. would have incurred losses in 2008 if the company had not contributed more than $610 million to make the funds whole.

Types of Stable Value Funds

Stable value funds can take several different forms. The differences among them lie in the source and nature of the underlying assets.

Separately Managed Account

This type of plan is offered by an insurance company. It is backed by assets in a separate account owned by the insurance company. If necessary, it is also backed by the assets of the insurance company’s general account. The assets in the separate account are owned by the insurance company. They are held solely for the benefit of plan participants.

Fund

Pooled Fund

This type of fund is also known as a “Pooled Fund.” It is offered by a bank or another financial institution. The fund pools assets from a group of unrelated retirement plans, allowing smaller plans to benefit from economies of scale.

Guaranteed Investment Contract (GIC)

A Guaranteed Investment Contract is issued by an insurance company. It pays a specified rate of return over a set period. This type of contract may be backed by the general account assets of the issuer or by assets held in a separate account. In either case, the insurance company holds the assets. The plan’s commitment to the participants is backed by the full financial strength and credit of the issuing company.

Synthetic GIC

This type of contract is similar to a regular GIC, but the assets are held in the name of the retirement plan or plan trustee.

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Sources:

• IN.gov. “Stable Value Fund.”
• MDPI. “Stable Value Funds Performance.”
• Pennsylvania State Employees’ Retirement System. “Stable Value Fund.”
• Stable Value Investment Association. “What Are GICs and Wraps?”
• Reuters. “Chrysler Stable Value Fund Loses Money-WSJ.”
• MDPI. “Stable Value Funds Performance,” Footnote 30.
• Stable Value Investment Association. “Separate Account GIC.”
• Stable Value Investment Association. “Pooled Fund.”

Source: https://www.thebalancemoney.com/what-is-a-stable-value-fund-2894169

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