Stable Value Funds - Not As Secure As You Think

Good Article from Employee Benefit News on Stable Value Funds: (condensed)

Remember the days when employees sat down with their HR/benefits representative to decide which of the available investment funds to include in a 401(k) retirement portfolio?

One fund looked like a sure thing — conservative and boring, but safe. Thinking they couldn't go wrong, many employees may have allocated 50% or more of 401(k) savings to that fund, also known as the "stable-value fund."

Despite the name and generally strong track record, stable-value funds aren't entirely stable anymore. Investors can lose money, and the funds also carry credit risks. While stable value fund managers try to maintain a fixed $1 unit price, they can't guarantee it because the yield and underlying investments fluctuate with the investments they are in.

For example, in 2005, the Trust Advisors Stable Value Plus fund declared bankruptcy. And in December 2008, Invesco's stable value fund available to Lehman Brothers employees lost 1.7%. Today, the market value of many stable value funds is below the book value. And more of these funds could be impacted as bankruptcies increase in the current financial mess.

It is important to note, however that many stable value funds have performed admirably in this market. For example, the ABN Amro Income Plus fund has had decent returns in excess of 3-4% per year over the last several years. Many investment advsiers are using this fund as their "money market". or "cash" option.

What is a Stable Value Investment?

So what is a Stable Value Fund? They are designed for very conservative investors, those near retirement perhaps. They generally offer returns that are a few percentage points higher than your average fixed investment (CD, or money market) with just a bit more risk.

OK, so what am I actually investing in? Until recently, most of them relied heavily on guaranteed investment contracts, or GICs. These are contracts between insurance firms and a company's retirement plan guaranteeing employees a certain rate of return. Now the majority of stable-value assets are invested in "synthetic GICs," also known as "wrapped bonds". These are high-quality bonds that are bound by insurance "wrappers." If a stable-value portfolio falls below the rate of return set by the wrapper, the insurer pays the difference, keeping the fund stable. If the portfolio gains beyond the set return, the fund pays the insurer the difference. These bonds currently comprise about 70% of the assets of the average stable-value fund. There are some similarities to some annuity contracts, in the sense that they both involve an element of “insurance”. Of course, annuity investments have many more variations and nuances of their own.

Welcome to Stable Value Investments

Welcome to Stable Value Funds blog. We will define what exactly a Stable Value investment is, who it is appropriate for, and in what type of vehicles they can be used in. For example, stable value funds can be part of a 529 plan, a 401k plan, 403b plans, regular investment account, and just about anything else. In the coming weeks we will add features so that users can enter their own comments on these investments as well.

The financial news is focusing on these investments more as the market keeps struggling and investors are looking for ways to make money in the market with lower risk. We will go over the good and bad of these, so you can make informed investment decisions.

As with any investment, especially Stable Value Funds, things can change quickly, so it helps to have access to daily financial headlines whether you are an investment broker, or an individual investor.