Introduction

Stable Value Funds (SVFs) are a type of investment vehicle designed to cater to the needs of conservative investors who prioritize capital preservation, steady income, and liquidity. These funds are typically included in the investment lineup of retirement savings plans, pension plans, and 401(k) plans, among others.

The underlying principle of SVFs is to create a diversified portfolio of high-quality fixed-income securities, including bonds, cash, and short-term debt instruments. By doing so, investment managers aim to generate a consistent income stream while minimizing the risks associated with market volatility. Essentially, SVFs serve as an alternative to cash or money market investments by providing a relatively stable investment opportunity with a low risk of loss.

SVFs are known for their stability. This is one of their critical benefits. While other investment vehicles like mutual funds are susceptible to market fluctuations, SVFs offer a more predictable rate of return, making them an attractive option for investors who want to preserve their assets.

Making Changes to a Stable Value Fund

Stable Value Funds may have unique characteristics when you decide to move your 401(k) out of that investment. Although it typically does not affect the individual investor directly, it can significantly impact the overall 401(k) plan. Therefore, it is crucial to thoroughly understand the ins and outs of your Stable Value Fund before making any investment decisions for your retirement plan.

Stable Value Put Options

When exiting a Stable Value Fund, it's important to note that some funds have put options on them. This means that if the 401(k) plan decides to move away from the fund, the plan may be required to provide a notice to the fund provider with enough time to move out of the fund. In many cases, Stable Value Fund options require the plan to provide 12 months' notice before they can exit the fund. This common practice is meant to provide a smooth transition and protect the interests of all parties involved.

If you ignore a Stable Value put option, it could negatively affect the value of your participant's account value.

Market Value Adjustments

Another potential liquidity issue to understand is Market Value Adjustments (MVAs). MVAs are applied to the principal value of SVF units when investors withdraw their funds before the maturity date. The MVA is designed to adjust the units' price to the underlying assets' current market value. In other words, if the interest rates have risen since the initial investment, the MVA will reduce the units' principal value to reflect the underlying assets' lower current value. This adjustment ensures that investors receive a fair market value for their units, even if they decide to withdraw their funds early.

Overall, the MVA feature is essential to consider when investing in SVFs. It helps to ensure that the value of the investment reflects the current market conditions and helps to preserve the interests of all investors in the fund. That said, just like Stable Value puts, exiting a Stable Value Fund with a market value adjustment tied to it may negatively impact participants.

Recordkeeper Discounts

Recordkeeping companies may offer their own proprietary Stable Value Fund. If you use their Stable Value Fund, the recordkeeper may provide a discount as they receive revenue from the assets invested in their proprietary funds.

Our team is responsible for recommending or managing the investments in the retirement plan lineups we advise. We exercise extra caution when it comes to proprietary funds. Our recommendations are based on what we believe is best for the retirement plan and its participants, and we consider the potential impact on overall plan fees if we need to replace any of the investments offered.

It is important to note that proprietary, Stable Value Funds often require price adjustments if they need to be replaced. Therefore, if the fund is no longer suitable for the plan, replacing it may increase the overall cost of recordkeeping for the 401(k).

Stable Value Fund as a Default Fund

SVFs typically provide a higher rate of return than traditional savings money market accounts or money market funds. However, they may not offer the same potential for long-term growth as other types of investments, such as equity-based mutual funds. Therefore, they are most suitable for conservative investors who prioritize capital preservation and steady income over high-risk, high-reward investments.

Some plan administrators believe having the Stable Value Fund as the default fund will save them from employees potentially losing money in their accounts. The problem is that it assumes a Stable Value Fund is appropriate for all employees.

If an employee is placed in a fund that is too conservative, that employee could lose purchasing power over time due to inflation. This is one of the reasons why target-date funds are so popular. 

Target-date funds automatically invest participant funds according to their age. This means the funds will be more aggressive for younger investors and automatically make them less aggressive as they age.   

Conclusion

In conclusion, Stable Value Funds can be an excellent option for conservative investors looking to preserve capital while generating a steady income. However, it's essential to be aware of the risks associated with these funds, such as inflation and interest rate risks, and consult a financial advisor before investing.

CUI Wealth Management can help you review these funds. We can provide an in-depth analysis of these funds and a detailed report about your retirement plan's current stable value fund. Whether you are looking for a 401(k) advisor in the Salt Lake City, Utah, area or are one of the other several states we serve, we would be happy to provide a second opinion on your employer-sponsored retirement plan.