Key Takeaways
- A stable value fund (SVF) is a conservative fund investment option. It's only for those in defined contribution plans, such as 401(k)s.
- SVFs retain the value of your initial investment, no matter what the stock and bond markets are doing.
- Stable value funds invest in fixed-income securities and wrap contracts offered by banks and insurance companies.
Definition and Example of a Stable Value Fund
A stable value fund is a conservative fund investment option, or one that is focused on the preservation of capital. That means it retains the value of your cash, no matter what the stock and bond markets are doing. The risk is low, but the return you get is low as well. It's only available to participants in defined contribution plans, such as 401(k)s.
Alternate names: Stable value funds are also called:
- Capital accumulation funds
- Principal protection
- Guaranteed funds
- Preservation funds
- Guaranteed investment contracts (GICs)
- Group annuity contracts
Acronym: SVF
For example, a business or government agency might offer a stable value fund as one of the options where employees can invest the money from a 401(k) or 403(b) plan. It wouldn't offer the employees much growth for their retirement funds, but it would ensure that none of the money they invest is lost.
A stable value fund is similar to a money market fund but offers slightly higher yields than a money market fund without too much added risk.
Note
In 2018, more than $800 billion was invested in stable value assets. About three-fourths of defined contribution plans offered a stable value option.
How Do Stable Value Funds Work?
Stable value funds invest in fixed-income securities and wrap contracts offered by banks and insurance companies. Wrap contracts often guarantee a certain return, even if the underlying investments decline in value.
To support that guarantee, a wrap contract relies on both the value of the associated assets and the financial backing of the wrap issuer. Both banks and insurance companies can issue wrap contracts. That means that your money should never be worth less than your initial investment in the fund. The company offering the wrap contract guarantees a certain return, no matter what happens to the economy at large. If, for some reason, the fund does lose value, it is the responsibility of the wrap issuer to make the funds whole.
Note
Be wary of funds charging 1% or more. These fees can eat into the low returns that a stable value fund provides.
Stable value funds come with risks, like any investment. With SVFs, risks could involve the company running the fund or offering the wrap contract, or a company that is substantially invested in the fund.
Bankruptcy, credit quality, or other challenges to financial solvency for any of these participants can impact how safe your investment is.
It's possible to lose money in stable value funds, but that has happened only a few times. In 2009, an SVF in a deferred-compensation plan for workers at Chrysler paid only 89 cents on the dollar when it was liquidated before the carmaker could begin bankruptcy proceedings.
In December 2008, an SVF managed by Invesco for Lehman Brothers workers fell by 1.7% in value. That was after many former workers of the bankrupt Wall Street firm withdrew their money. To cover the withdrawals, the fund had to quickly sell bonds at a loss. The fund was still able to return about 2% for all of 2008.
Some SVFs managed by State Street Corp. would have had losses in 2008 if the company hadn't contributed more than $610 million to make the funds whole.
Types of Stable Value Funds
Stable value funds can take a few different forms. The differences among them are 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 segregated account held by the insurance company. If needed, it is also backed by the insurer’sgeneral account assets. The assets in the separate account are owned by the insurance company. They are held only for the benefit of the plan participants.
Commingled Fund
This type of fund is also known as a "pooled fund." It is offered by a bank or other financial institution. It combines assets from a variety of unaffiliated retirement plans. so it can help smaller plans gain economies of scale.
Guaranteed Investment Contract (GIC)
A GIC is issued by an insurance company. It pays a certain rate of return over a given length of time. This kind of contract may be backed by the issuer’s general account assets. It also could be backed by assets held in a separate account. In either case, the insurance company owns the assets. The obligation to those in the plan is backed by the full financial strength and credit of the company that issued it.
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 a trustee of the plan.
FAQs
A stable value fund is a portfolio of bonds that are insured to protect the investor against a decline in yield or a loss of capital. The owner of a stable value fund will continue to receive the agreed-upon interest payments regardless of the state of the economy.
Should I move my 401k to a stable value fund? ›
Should I Move my 401(k) to a Stable Value Fund? This depends on your risk tolerance, and how long you have until you retire. Stable value funds are ideal for investors nearing retirement. They are not designed for growth.
Can I withdraw from stable value fund? ›
Participant withdrawals and transfers are freely permitted daily according to plan provisions. Stable value funds from The Standard provide participants with full book value liquidity for benefit payments (death, disability or retirement) and transfers to other investment options.
How safe is the Putnam stable value fund? ›
The fund's returns will fluctuate with interest rates and market conditions. The fund is not insured or guaranteed by any governmental agency. Funds that invest in bonds are subject to certain risks including interest- rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall.
Can I buy a stable value fund in my IRA? ›
Stable value funds are only available in defined-contribution retirement plans. “They are not an option for an IRA, brokerage account or other investors,” Riter said.
What are the disadvantages of stable value funds? ›
However, there is a danger if a portfolio is weighted too heavily in lower-yielding investments such as stable value funds. The investor risks being squeezed by inflation down the road. A retirement income that seems sufficient initially can gradually become inadequate as the years pass and inflation mounts.
Is a stable value fund safe if the market crashes? ›
Sometimes, bonds lose value when stocks do – especially lower-quality bonds. We saw this recently during the coronavirus-inspired stock market crash in early 2020. In short, stable value funds are generally immune from interest rate risk and correlation to stocks during market panics; hence stable value.
What is the average return on a stable value fund? ›
The 15-year annualized return for stable value funds as of March 2023 was 2.99%, according to the non-profit group Stable Value Investment Association (SVIA). The same figure for money market funds was 0.55%.
Do stable value funds increase with interest rates? ›
Stable value investments' return advantage over money market funds tends to narrow or become negative when short-term rates rise, particularly with rapid increases as we have seen during this most recent rate hiking cycle; however, long-term fundamentals still favor stable value investments.
Are stable value funds worth it? ›
Stable Value Fund Advantages and Disadvantages
Stable value funds are low-risk investments that pay higher interest rates than money market funds. However, these funds also charge annual fees to cover the cost of insurance, which could be higher than the cost of other comparable bond funds.
In sum, adding stable value as a fundamental component of your retirement plan, especially as you approach retirement not only provides capital preservation of your assets but in the past has also kept up with inflation while providing steady returns.
Has a Stable Value Fund ever lost money? ›
I had all my money in this fund since I was about to rollover to my current employee sponsored plan. The loss was realized when this fund was terminated and all money was converted into a Money Market Fund by default. I had no idea a stable value could go down as more than 5%.
What is JP Morgan Stable Value Fund? ›
The fund seeks to provide capital preservation, liquidity, and current income at levels that are typically higher than those provided by money market funds. The strategy is primarily comprised of investment contracts called benefit responsive wraps (”wrap contracts”) that are issued by banks and insurance companies.
What can I use instead of stable value funds? ›
money market funds. Money market funds are the primary alternative to a stable value strategy, when plan sponsors decide which stable net asset value option to offer its participants.
Are stable value funds taxable? ›
Pooled stable value funds
Tax-exempt, pooled investment vehicles are maintained by a bank or trust company, and they're available only to ERISA-qualified retirement accounts. They're exempt from many of the regulatory requirements that drive mutual fund expenses, generally giving them a fee advantage over mutual funds.
Does Vanguard offer a stable value fund? ›
Need more information on Vanguard stable value? Vanguard offers several stable value products that may be right for you and your capital preservation strategies. If you'd like more information about designing a retiree-friendly investment lineup for your 401(k) plan, our experts can help.
Should I put money in stable value fund? ›
Stable value funds provide a reliable way to generate steady returns over time while minimizing volatility. Stable value funds have historically outperformed both money market funds and the rate of inflation, which has made them a go-to capital preservation option for defined contribution plan sponsors.
Should I move my 401k when the market is down? ›
Can You Stop Your 401(k) From Losing Money? In a down market, you could transfer all of your holdings to cash or money market funds, which are safe but provide little to no return. (They may not even keep up with inflation.) This, however, is not typically advised unless you are nearing retirement.
What happens to stable value funds when interest rates rise? ›
Increases in interest rates provide the opportunity to reinvest the underlying bond portfolio's cash flows at higher rates, which – all else equal – should ultimately translate to a higher crediting rate for investors; however, due to its loss amortization feature, a stable value contract's crediting rate reacts to ...
