Stable value fund

A stable value fund is a type of investment available in 401(k) plans and other defined contribution plans as well as some 529 or tuition assistance plans. Stable value funds are often made available in these plans under a name that intends to describe the nature of the fund (such as capital preservation fund, fixed-interest fund, capital accumulation fund, principal protection fund, guaranteed fund, preservation fund, or income fund among others). They offer principal preservation, predictable returns, and a rate higher than similar options without proportionately increasing risk. The funds are structured in various ways, but in general they are composed of high quality, diversified fixed income portfolios that are protected against interest rate volatility by contracts from banks and insurance companies. For example, a stable value fund may hold highly rated government or corporate debt, asset-backed securities, residential and commercial mortgage-backed securities, and cash equivalents. Stable value funds are designed to preserve principal while providing steady, positive returns, and are considered one of the lowest risk investment options offered in 401(k) plans. Stable value funds have recently been returning an annualized average of 2.72% as of October 2014, higher than the 0.08% offered by money-market funds, and are offered in 165,000 retirement plans. A stable value fund is a type of investment available in 401(k) plans and other defined contribution plans as well as some 529 or tuition assistance plans. Stable value funds are often made available in these plans under a name that intends to describe the nature of the fund (such as capital preservation fund, fixed-interest fund, capital accumulation fund, principal protection fund, guaranteed fund, preservation fund, or income fund among others). They offer principal preservation, predictable returns, and a rate higher than similar options without proportionately increasing risk. The funds are structured in various ways, but in general they are composed of high quality, diversified fixed income portfolios that are protected against interest rate volatility by contracts from banks and insurance companies. For example, a stable value fund may hold highly rated government or corporate debt, asset-backed securities, residential and commercial mortgage-backed securities, and cash equivalents. Stable value funds are designed to preserve principal while providing steady, positive returns, and are considered one of the lowest risk investment options offered in 401(k) plans. Stable value funds have recently been returning an annualized average of 2.72% as of October 2014, higher than the 0.08% offered by money-market funds, and are offered in 165,000 retirement plans. The investment objective of stable value funds is to provide capital preservation and predictable, steady returns. During the 2008 financial crisis, stable value funds were one of the few 401(k) investments that produced a positive return; stable value fund returns generally ranged between 3 and 5 percent for 2008. Stable value funds generally invest in high credit rating bonds, typically AAA and AA, and then “wrap” them with contracts issued by banks and insurance companies that help smooth out the returns of the underlying portfolio of bonds. The wrap protects the fund in times of market volatility by smoothing out the losses and gains of the underlying investments over the duration of the fund. Another popular stable value structure is the general account product which provides a fixed rate of return for a stated period backed by the full faith and credit of the insurance company and transfers investment risks to the insurer as well. Stable value funds have a level of risk and stability similar to that of money market funds but generate higher returns. Stable value funds are offered in approximately half of all 401(k) plans and some 529 tuition savings plans. Individuals have invested $770 billion in stable value funds through 165,000 defined contribution plans, which include 457, 403(b) and 401(k) plans as of June 2015. Stable value funds have been around since the inception of US defined contribution plans in the 1970s. Initially they consisted of guaranteed investment contracts, or GICs, which were backed solely by the issuer’s claims-paying ability. GICs are issued by insurance companies and guarantee principal invested plus a periodically-reset interest rate for a specific duration. The primary concern plan sponsors had in regards to GICs was the lack of flexibility and ownership of assets, which was partly remedied with the creation of separate account GICs. Separate account GICs hold the assets of the plan in a separate account that cannot be used to settle claims against the insurer’s general account. Then in mid-1988 a broader array of stable value funds began to be offered, including the now common synthetic GIC. A synthetic GIC is a contract for a separately managed portfolio of fixed securities that is owned by the plan, often referred to as a wrap because it wraps the portfolio and protects it against rate fluctuations. Today, the most commonly used type of contract in stable value funds is the synthetic GIC and from 1999 through 2014 stable value funds averaged a total return of 4.35% with a standard deviation of 1.23%. For money-market funds, the average total return was 1.93% with a standard deviation of 2.08%; and for intermediate-term bonds, 4.82% and 3.15%. Stable value funds are structured in one of three ways: as a separately managed account, which is a stable value fund managed for one specific 401(k) plan; as a commingled fund, which pools together assets from many 401(k) plans and offers the benefits of diversification and economies of scale for smaller plans; or as a guaranteed insurance company account, which issues a group annuity contract directly to the plan. Regardless of how stable value funds are structured, they are a diversified portfolio of fixed income securities that are insulated from interest rate movements by contracts from banks and insurance companies. How this contract protection is delivered depends on the type of stable value fund investment purchased and is provided through one or more of the following investment instruments: A group annuity contract with an insurance company that provides principal preservation and a specified rate of return over a set period of time, regardless of the performance of the underlying invested assets. The invested assets are owned by the insurance company and held within the insurer’s general account.