Stable value is a core investment in defined contribution plans. In fact, it has been a part of DC plans for over 40 years. As of December 31, 2013, $719 billion dollars were invested in stable value, which accounted for 12% of all defined contribution assets.
Here are some reasons 401(k) participants choose stable value:
Higher overall returns
Stable value is averaging returns of 1.91% as of March 2014, which is significantly above those offered by investments with similar levels of risk (such as money market funds). Investors choose stable value because it is a safe place for them to keep a portion of money that they don’t want to expose to significant risk.
Stable value is also a good diversification vehicle. Since stable value has the lowest correlation (or relationship) to stocks, an allocation to stable value can be used to balance riskier investments. Stable value permits investors to build a more optimal portfolio and achieve a higher overall return than could otherwise be accomplished with the same level of risk.
Predictable and reliable returns
Stable value funds deliver a conservative positive return. Stable value’s predictable positive returns are provided through contracts with insurance companies and banks that protect the stable value fund from interest rate volatility and provide capital preservation.
No investment is risk-free, but for a safety-minded investor stable value is the obvious choice as it is one of the lowest-risk options available in defined contribution plans. Besides investing in an overall highly rated diversified portfolio of fixed income investments, stable value is protected by investment contracts from insurance companies and banks that protect investors from interest rate volatility and preserve principal. Stable value is one of the few investments that did not lose money for its investors during the market crash of 2008. In fact, it produced a positive return during 2008 which averaged 4.05%.
Delivered positive, consistent conservative returns though many market cycles
Stable value has been around since the inception of defined contribution plans in 1974 and has been tried and tested by numerous market conditions. Through this it has remained a trusted capital preservation option used in 401(k), 457, 403(b), and 529 plans that accounts for over 12% of the $5.9 trillion defined contribution plan assets as of December 31, 2013.
It’s important to keep in mind that how you invest for your retirement depends on your life circumstances as well as your retirement date and your risk tolerance. Stable value works best as part of a well-balanced portfolio to help you manage risk and preserve principal while still earning a respectable return. For help determining what an appropriate asset allocation would be for you, please speak with your retirement plan sponsor or financial advisor. For more information on stable value, check out these other helpful resources: