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Home > Help Desk > FAQ > How Stable Value Funds Differ from Principal Protected Funds
How Stable Value Funds Differ from Principal Protected Funds
The stock market's volatility and low returns have drawn investors' attention to funds that offer principal protection. Principal protected funds promise just that--that your initial investment will be preserved regardless of market conditions.
Traditional stable value funds, available in most defined contribution plans such as 401(k) plans, have similar objectives as principal-protected funds. However, stable value funds and principal protected funds differ greatly in how they achieve their objective of preserving principal. These differences are summarized below:
- What is in the fund? Stable Value doesn't hold stock.
Stable value funds maintain the value of the principal and all accumulated interest regardless of interest rate moves because of the investments held by the fund. A stable value fund generally holds a mix of high-quality, intermediate-term bonds and guaranteed-interest contracts (GICs) from insurance companies. A stable value fund's portfolio is protected against interest rate risk by a bank or an insurance company through a wrap.
Most principal-protected funds invest in a variety of stocks and/or bonds. Stable value funds typically do not invest in stocks.
- Where funds are offered to investors. Stable Value is in 401(k) plans.
Most investors can only get stable value through an employer-sponsored tax-deferred savings plan like a 401(k). At the end of 2002, over $315 billion was invested in stable value funds through 401(k) plans. Stable value is also found in other tax-deferred savings vehicles such as 529 college savings plans and Individual Retirement Accounts (IRAs).
Principal protected funds are offered directly to investors and are available outside of tax-deferred savings vehicles.
- Access to your investment. Stable Value gives it without penalty.
Stable value funds generally give you access to your investment without the loss of principal and accumulated earnings or penalty. Stable value does not require a set holding period. Even though stable value funds give an investor access to their money, some funds may restrict transfers to competing funds such as a money market or bond fund by requiring that money transferred out of stable value be first invested in a stock fund before it can be invested in a bond or money market fund.
Principal protected funds do not permit access without imposition of penalties until an investor fulfills the specific period of time required by the fund, usually 5 to 10 years according to the National Association of Security Dealers. Additionally, if an investor takes his/her money out of a principal-protected fund before the term of the fund is met, the investor loses the principal protection on his/her investment.
- Fees. Stable Value fees are less.
Since stable value funds are primarily offered as part of company's traditional defined contribution plan, their costs tend to be lower. According to a recent IOMA/RogersCasey study on fees, stable value fees average 41 basis points (excludes recordkeeping costs). According to NASD, principal protected funds have fees between 150 to 200 basis points.
- What is stable value fund?
A stable value fund combines the best features of bonds and money markets: bond-like returns with the liquidity and safety of money market funds. Stable value funds remove the negative of bonds, the potential loss or fluctuation of principal.
Stable value is a conservative fixed income investment. It is offered in a variety of tax-deferred savings vehicles: defined contribution plans including 401(k)s, 529 college savings plans and now Individual Retirement Accounts (IRAs). The assets in a stable value fund are a mix of high-quality, intermediate-term bonds and guaranteed-interest contracts (GICs) from insurance companies. A stable value fund's portfolio is protected against interest rate risk by a bank or an insurance company through a wrap.
To learn more about stable value funds, go to www.stablevalue.org. To find out more about how these general characteristics apply to your Stable Value Fund, please contact your company's defined contribution plan manager or human resources department.
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