For U.S. retirees and older workers on the cusp of retirement, stabilizing their investment portfolios in their 60s, 70s, and beyond is no luxury – it’s a necessity.
That’s where stable value funds can help, mainly by adding an insurance element to guarantee portfolio returns.
Over 80% of U.S.-defined contribution plan sponsors offer stable value funds in their retirement fund lineup, according to 2022 data from MetLife. The same study also reports that stable funds outperform traditional “defensive-minded” funds in retirement portfolios such as money market funds.
What are stable value funds and what do they offer retirement savers? Here’s an inside look.
5 Things to Know About Stable Value Funds
- Over 80% of employer plan sponsors offer stable funds.
- Stable funds have a protective insurance element.
- With stable funds, returns are low but safety is high.
- Retirement savers can get stable funds through their 401(k).
- Watch out for high fees that can cut into returns.
What Is a Stable Value Fund?
Stable value funds are a portfolio of bonds that have some insurance guarantee behind them.
“These funds receive an agreed-upon interest rate and are often laddered to mature over a specified time frame, allowing for preservation of capital with a rotating stream of income,” says Lori Gross, an investment advisor at Ohio-based Outlook Financial Center. “The insurance behind stable funds is referred to as a guaranteed investment contract (GIC) and is guaranteed by the claims-paying capability of the insurance company that is backing them.”
Are stable funds safe? In general, yes.
“All investments have some amount of risk involved,” Gross says. “If the underlying bonds are of high quality and are held to maturity, the risk is much lower than general stock or bond trading.”
As a fund that invests primarily in fixed-income securities, stable value funds are uniquely shaped with safety in mind.
“This creates an already low level of risk, which is then made even more secure with the addition of an insurance wrapper,” says Richard Gardner, chief executive officer at Modulus, a financial technology firm in Scottsdale, Arizona. “That means no matter the volatility of the market, an insurer or bank guarantees a stable return of interest payments without the loss of principal.”
Pros and Cons of Stable Funds
Stable value funds bring some much-needed safety measures to retirement portfolios. That said, there are downsides.
Pros
Guarantee factor. With stable value funds, any portfolio contribution never loses value, unlike a traditional bond portfolio that’s facing interest rate risk.
“These funds usually have trading restrictions so that they don’t have to sell a bond prematurely at a loss like what happened at Silicon Valley Bank,” Gross notes.
Volatility avoidance As the name reflects, stable value funds are indeed stable when it comes to return and principal preservation, making the investment an appropriate vehicle for risk-averse investors looking for low-volatility investments.
“The insurance portion of the fund may help reinforce conservative investors’ fears of volatility in the market,” says Vincent Grosso, founder of Pascack Capital, a New Jersey-based investment advisory firm.
They’re diversified. Due to the fund’s fixed-income composition, investors looking for income, such as retirees, would be wise to consider stable value funds as part of their portfolio allocation.
“Stable value funds contain a negative equity correlation which enables investors to use the funds as diversification in their portfolio allocation strategy,” Grosso notes.
Cons
Fees and charges. There is a cost associated with guaranteed insurance wrappers that “will eat into your profit margin,” Gross says. The expense ratio of the Fidelity Advisor Stable Value Fund, for example, is 0.70%. Annual fees of up to 1% are common in the stable fund sector.
Lower relative returns. Although a big benefit of stable value funds is predictable returns, the drawback is the returns are typically lower than investing in equities.
“This may not be an issue if an investor determines the risk-reward of equities are not worth it for them because of a low-risk tolerance or other suitability factors,” Grosso says.
Inflation risk potential. Inflation risk is a factor an individual should consider before investing in stable value funds.
“Due to lower returns, the fund has the possibility of not being able to keep pace with inflation,” Grosso added. “This means an investor can lose purchasing power due to the decrease in value of their money.”
Stable Value Funds Are Not Money Market Funds
“Stable funds are low-risk investments that pay higher interest rates than you would receive in a money market fund,” Gross says. “Money market funds are invested in cash instruments with very short durations.”
Most stable value funds are slightly more attractive than a money market account, in terms of return without accepting significantly more risk.
“Stable value funds are an ideal component of a portfolio for those who are nearing retirement age, or for those who don’t want to accept a lot of risk during recessions and other times of market volatility,” Gardner says. “On the other hand, these funds will never deliver the kinds of returns that investors can earn via real estate, stocks and other investment vehicles.”
Here’s How to Invest in Stable Value Funds
For retirees, the optimal path to investing in stable value funds is through your 401(k) plan – and that means going through your employer.
“Many employer-sponsored 401(k) plans have stable fund options within their list of choices,” Gross says. “These funds usually have trading restrictions that require them to be held for a specified period ranging from 30 days to one year.”
If you’re working with a financial planner, it’s also helpful to share questions and concerns regarding any changes within your retirement portfolio, Gross advises.
Since stable value funds are not widely available, investors will typically only see stable value funds in a 401(k) along with other defined contribution plans. “This limitation applies if an investor wants to roll their 401(k) into an IRA as they will not be able to replicate their 401(k) portfolio in an IRA,” Grosso says.
When examining stable value funds, focus on how long the fund has been in operation, the fund management tenure, portfolio composition, fees, performance and investment minimums.
“Once that research has been completed, select the fund through your workplace retirement plan portal or contact the customer service department to implement the investment,” Grosso says. “As with any investment, monitor the fund to make certain the fund remains a suitable part of their portfolio and the fund is performing as expected.”
