Stable Value funds are low risk choices in many 401(k)s. The funds create the illusion of stability by owning bonds and getting some big insurance company to eat any fluctuations in the fund’s price that result from bond prices changing when interest rates move.
Stable value funds tend to benefit investors over more traditional bond funds when interest rates rise sharply, but underperform when rates fall. But creating the illusion of stability isn't free, and you can expect stable value funds to underperform low fee bond funds over long periods of time.
The insurance industry has done a good job of getting this product into 401(k)s (where they now represent around 10% of all plan assets). Unfortunately for the insurance business, stable value funds are not going to be allowed in new automatic enrollment choices – the plan to opt in employees to their 401(k) as if they actively took steps to save. Apparently the labor department would rather see young investors splurging on stocks with a traditional bond chaser than use the nervous nelly stable value choice. Looks like the fund lobby beat the insurance lobby on this one.
A recent WSJ article notes the usefulness of stable value funds in 401(k)s:
But others say these funds, which are hybrids of fixed-income investments and insurance policies and are found in 401(k) plans and other retirement accounts, can have a place in a portfolio's conservative corner. They offer a good parking place for money that may be needed soon and may also work as a substitute for cash or as a holding for extremely risk-averse investors…
In some ways, they are similar to bank certificates of deposit. They aim to protect an investor's principal, and offer a yield that's typically at least a percentage point higher than that of a money-market fund with less volatility than a short-term bond fund….
We’re not so sure the portfolios of stable value funds are as rock solid as everyone thinks. Some of them might have invested in some once top investment grade mortgage debt that has suddenly fallen far down the bond quality totem pole. Unlike CDs, they are not guaranteed by the U.S. government.
In general we prefer low fee short term bond funds or money market funds for the safe yield allocation in a 401(k). Unfortunately sometimes stable value is the only safe choice in a 401(k) plan, or the bond or money market fund choices are expensive and crappy.
One oddity – why are ordinary super safe bank CD’s not in 401(k)s for a similar deliverable: no volatility and no risk?
Stable Value funds are low risk choices in many 401(k)s. The funds create the illusion of stability by owning bonds and getting some big insurance company to eat any fluctuations in the fund’s price that result from bond prices changing when interest rates move.
Stable value funds tend to benefit investors over more traditional bond funds when interest rates rise sharply, but underperform when rates fall. But creating the illusion of stability isn't free, and you can expect stable value funds to underperform low fee bond funds over long periods of time.
The insurance industry has done a good job of getting this product into 401(k)s (where they now represent around 10% of all plan assets). Unfortunately for the insurance business, stable value funds are not going to be allowed in new automatic enrollment choices – the plan to opt in employees to their 401(k) as if they actively took steps to save. Apparently the labor department would rather see young investors splurging on stocks with a traditional bond chaser than use the nervous nelly stable value choice. Looks like the fund lobby beat the insurance lobby on this one.
A recent WSJ article notes the usefulness of stable value funds in 401(k)s:
But others say these funds, which are hybrids of fixed-income investments and insurance policies and are found in 401(k) plans and other retirement accounts, can have a place in a portfolio's conservative corner. They offer a good parking place for money that may be needed soon and may also work as a substitute for cash or as a holding for extremely risk-averse investors…
In some ways, they are similar to bank certificates of deposit. They aim to protect an investor's principal, and offer a yield that's typically at least a percentage point higher than that of a money-market fund with less volatility than a short-term bond fund….
We’re not so sure the portfolios of stable value funds are as rock solid as everyone thinks. Some of them might have invested in some once top investment grade mortgage debt that has suddenly fallen far down the bond quality totem pole. Unlike CDs, they are not guaranteed by the U.S. government.
In general we prefer low fee short term bond funds or money market funds for the safe yield allocation in a 401(k). Unfortunately sometimes stable value is the only safe choice in a 401(k) plan, or the bond or money market fund choices are expensive and crappy.
One oddity – why are ordinary super safe bank CD’s not in 401(k)s for a similar deliverable: no volatility and no risk?
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