Stable-Value Funds Can be Shaky
A type of investment known as stable-value funds are available only in tax-deferred plans. As implied by the name, these funds are meant for conservative investors. They can often be a good choice, and many 401(k) plans have them on the menu. While money market funds are currently offering almost nothing in terms of interest (Fidelity Cash Reserves, for example, is now giving you a whopping 0.01%), stable value funds this past August averaged a 2.55% annualized rate of return.
That seems to make the choice a no-brainer. But prudence, as always, is necessary.
For one well-publicized example, Chrysler Stable Value Fund B, which was only available to white-collar workers at the number three U.S. auto manufacturer, fell 11% at one point in 2009. In other words, despite the name of the fund, those employees received only 89 cents on the dollar when the fund had to close down.
Not all stable-value products are the same, but all explicitly seek to preserve principal. In general, the portfolios consist of various types of bonds. To smooth out the inevitable fluctuations in the underlying investments, they buy insurance “wrappers” which are supposed to kick in when bond prices fall. Some stable-value investments can also be insurance contracts such as annuities issued directly to a company’s 401(k) plan.
Problems tend to occur, however, when everyone rushes for the exit at the same time, and, let’s face it, Chrysler in 2009 didn’t seem rock solid. The lesson is that if it can happen once, it can happen again. Basically, anytime an employer runs into trouble or undergoes a major restructuring, or if bond prices plummet, stable value funds may experience turbulence.
There are other potential problems with stable value funds. As Businessweek magazine recently pointed out (9/29/11), you may face unexpected restrictions on how or when you can transfer or withdraw your money…
“People who use one of the stable-value annuities issued by TIAA-CREF may only withdraw or transfer funds according to a set schedule of 10 payments over nine years.”
That’s pretty restrictive. So while I can recommend stable-value funds under certain circumstances, please be sure you realize that they are not a true substitute for plain vanilla money market mutual funds.