Stable value strategy (2024)

FAQs

What are stable value strategies? ›

Stable value strategies are capital preservation investments (typically separate accounts or commingled vehicles) available in 401(k)s and other retirement savings plans.

Stable value funds are a portfolio of bonds with an insurance guarantee. Over 80% of employer-sponsored 401(k) plans offer stable funds. Stable value funds offer safety for risk-averse savers, but returns are generally low. Beware of high fees associated with stable value funds that can cut into your returns.

Stable Value® investment options generally refer to a relatively low-risk fixed income asset class available only in tax-qualified retirement savings plans such as 401(k), 403(b) and governmental 457(b) plans.

Interest is credited to balances on deposit in the fund on a daily basis based on the daily equivalent of the annual effective crediting rate (“daily factor”), which is applicable to such balances.

Stable value is an asset class that is designed to provide capital preservation and relatively stable returns. Capital Preser- vation means investors should expect to maintain 100% of their initial investment.

Disadvantages to Consider

However, these funds also charge annual fees that cover the cost of the insurance wrappers, which can be as high as 1% per year in some cases. Furthermore, most stable value funds prevent investors from moving their money directly into a similar investment, such as a money market or bond fund.

Stable value funds are often compared to money market funds since both are similarly low-risk. Here's a look at historic returns for both. The 15-year annualized return for stable value funds as of March 2023 was 2.99%, according to the non-profit group Stable Value Investment Association (SVIA).

A stable value investment is neither insured nor guaranteed by the U.S. government. There is no assurance that the investment will be able to maintain a stable net asset value, and it is possible to lose money in such an investment. All investing is subject to risk, including the possible loss of the money you invest.

Stable value funds remain just that: stable. They don't grow over time, but they don't lose value either. In times of recession or stock market volatility, stable value funds are guaranteed.

How does stable value fund work? ›

Stable value funds are conservative investments that can offer your retirement portfolio steady income with a guaranteed principal. Funds do this by purchasing insurance guarantees to offset the loss of principal. The majority of defined contribution plans invest in stable value funds because of higher returns.

In sum, adding stable value as a fundamental component of your retirement plan, especially as you approach retirement not only provides capital preservation of your assets but in the past has also kept up with inflation while providing steady returns.

If an investor is looking for a low-risk option that provides steady income and capital preservation, a stable value fund may be a good choice. However, if an investor is willing to take on more risk for the potential of higher returns, a bond fund or other investment option may be more appropriate.

As anticipated, money market funds have provided more favorable rates in the short run. Even though stable value may lag for now, history shows, and we expect, that stable value crediting rates will more gradually adjust to the higher rate environment with minimal volatility along the way.

Savings accounts and certificates of deposit (CDs) are examples of assets that are commonly recognized as stable value collateral. Both savings accounts and CDs are financial instruments offered by banks and other financial institutions.

Whereas money market funds typically have an average maturity of 30 to 45 days, stable value funds usually have a 3.0 to 3.5-year average maturity. The ability to invest in longer-dated, higher- yielding assets has historically provided stable value funds a return advantage compared to money market funds.

Relative-value arbitrage is an investment strategy that seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities—thereby allowing investors to potentially profit from the “relative value” of the two ...