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Home > Help Desk > FAQ > FAQ on Stable Value Funds
Stable Value Investments
Stable value investments offer unique risk/return characteristics. They are available
to participants in defined contribution savings and profit sharing plans and 529 Tuition
Assistance Plans. Stable value investment options are included in two-thirds of employee-directed
401(k) plans, representing over 33% of assets that total $396 billion in value.
Unlike other investments, they offer investors certainty or preservation of principal
and accumulated interest earnings. Participants who invest in stable value options receive
interest income comparable to that earned on an intermediate investment grade corporate bonds,
but without the associated market risk. In comparison to money market funds, stable value
investments have equal stability, but significantly higher average interest rates. Finally,
stable value options in participant-directed defined contribution plans allow participants
access to their accounts at full value for withdrawals and transfers as permitted by the
defined contribution plan.
Your Questions Answered About Stable Value
- What is stable value?
Stable value investments are fixed income investment vehicles offered through defined
contribution savings accounts and now some mutual funds and IRAs. The assets in stable
value funds are high quality bonds and interest-bearing contracts, purchased directly
from banks, insurance companies or mutual funds, that guarantee to maintain the value
of the principal and all accumulated interest.
- What are the benefits of stable value investments?
Stable value investments provide consistent, predictable growth over the long term.
They are ideal for anyone who wants to preserve capital and obtain a secure, high rate
of return without market risk.
- How do stable value investments compare to bond funds?
Stable value investors receive interest income comparable to that earned on an intermediate
investment grade corporate bond fund, but without market risk.
- How do stable value investments compare to money market funds?
In comparison to money market funds, stable value investments have equal liquidity and stability,
but significantly higher average interest rates.
- Are there any penalties for withdrawing stable value investments before retirement?
In general, stable value investments have no withdrawal restrictions. However, since they are
purchased within retirement plans, the plan itself may have withdrawal restrictions. Barring such
restrictions, stable value investors have access to their accounts at full value for withdrawals
and transfers without penalty. Unlike a certificate of deposit, it is not necessary to wait until
maturity to avoid an interest penalty on withdrawals.
- Who can buy stable value?
Stable value investments are available through defined contribution savings, profit sharing plans,
and now some IRAs and mutual funds. However, not all plans or mutual fund companies offer them.
- How many defined contribution plans offer stable value investments?
Stable value investments are included in almost two-thirds of all defined contribution savings and
profit sharing plans.
- How big is the stable value market?
The pool of stable value investments currently totals approximately $321 billion. Stable value
investments are offered by almost two-thirds of all defined contribution savings and profit sharing
plans, and represent over 33 percent of the assets in these plans. Stable value as a percent of
total assets has modestly increased over the
past few years, primarily as a result of the aging of the baby boomers and
the extended bear market in stocks, which has increased the volatility of
equity assets and caused a decrease in equity assets in most defined
contribution plans.
- Does stable value encourage people to save for retirement?
According to a recent Dreyfus Fund study, 68% of investors will only consider a safe or guaranteed
investment vehicle. Stable value investments are compatible with the risk profile of this majority, thereby
making the decision to save easier. In another study by John Hancock, 23% of participants currently
contributing to a stable value fund said they would not contribute as much to the defined contribution plan
if the stable value fund were eliminated.
- Aren't stocks a better long-term investment than stable value?
Over time, stock funds will produce a higher return than stable value funds. However, the unique risk/return
characteristics of stable value investments make them an excellent choice for anyone who wants to protect assets
and balance portfolio risk.
- How do investors use stable value in their portfolios?
Since stable value is not subject to market risk, it is an excellent choice for those wishing to diversify a
stock portfolio. Substituting stable value for an actively managed bond portfolio will allow an investor to
increase their allocation to equities without increasing the risk of their overall investment portfolio.
Also, because stable value can be withdrawn without penalty, it is ideal for those wanting to keep a portion
of their funds liquid, whether for emergency use, financing a home purchase, or funding a college education.
- Are stable value investments like Guaranteed Investment Contracts?
A Guaranteed Investment Contract is an example of an investment purchased as an asset of a stable value fund.
- What type of investments are held in stable value funds?
A broad array of fixed income investments are used in stable value funds to prudently diversify the fund, reduce
risk and volatility, and to achieve appropriate investment returns. Stable value investments are typically purchased
from financial institutions such as insurance companies, banks, investment management firms or mutual funds. Stable
value funds promise to pay investors a predictable return or yield, and preserve investment principal and accumulated
interest earnings for the life of the investment. A GIC, for example, is one type of investment that can be held in
a stable value fund.
- Who guarantees stable value?
Stable value investments are backed by the financial strength of the issuing financial institution and the underlying assets.
- Haven't there been problems with stable value investors losing their money? What about Executive Life, Mutual Benefit Life,
and Confederated Life?
There have been isolated incidents when stable value funds were not immediately available to investors. Even in these
three situations, participants were made whole. In those situations, recoveries were excellent when compared to the
average recoveries from bond defaults. Moreover, these three companies represented less than one percent of the market
for stable value products.
- Could these problems happen again?
The stable value industry works continuously to ensure that stable value investments are sound and protected. There are rules
governing how companies can invest stable value funds, and there are contingencies to insure that investors will always be
fully compensated. Finally, there are new products, such as synthetic GICs, which provide additional levels of security.
- What is the Stable Value Investment Association?
Established in 1990, the Stable Value Investment Association is a non-profit organization dedicated to educating retirement
plan sponsors and the public about the importance of saving for retirement and the contribution stable value can make toward
achieving retirement security.
- Who belongs to the Stable Value Investment Association?
The membership represents every segment of the stable value investment community, including plan sponsor companies, insurance
companies, banks, investment managers and consultants.
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