Stable Value Funds: The Cornerstone of Secure Retirement Planning

Stable value funds have long been a foundational element in employer-sponsored retirement plans, offering participants a reliable and low-risk way to preserve their savings while generating steady income. Designed to protect the principal invested, these funds are especially popular among individuals nearing retirement or those seeking to safeguard their nest egg from market volatility.

What Are Stable Value Funds?

Stable value funds are a unique asset class focused on capital preservation and liquidity. They deliver consistent, positive returns that typically exceed those of money market funds, while avoiding the sharp fluctuations of stocks and bonds. These funds are available exclusively in tax-qualified savings plans such as 401(k), 457, 403(b), and 529 plans, and are not offered in IRAs or retail brokerage accounts.

How Stable Value Funds Work

The steady returns of stable value funds are made possible through investment contracts issued by banks and insurance companies. These contracts guarantee that participants can transact at their invested balance plus accrued interest, even during periods of market volatility. This benefit responsiveness ensures retirees have predictable income and flexible access to their funds when needed.

Types of Stable Value Funds

There are several types of stable value funds to meet the needs of different retirement plans:

• Individually Managed Accounts: Assets are owned and managed for a specific plan’s participants, allowing for customization, typically in larger plans.

• Pooled Funds (Commingled Investment Trusts/CITs): Assets from multiple plans are combined, making these funds suitable for smaller plans or those not requiring customization.

• Insurance Company General and Separate Accounts: Offered and guaranteed by a single insurance company, with assets managed by the insurer or an affiliate.

Contract Structures

Stable value funds use various contract structures to provide guarantees:

• Guaranteed Investment Contracts (GICs): Issued by insurance companies, these pay a specified rate for a set period and guarantee principal and interest.

• Wrap Contracts: Assets are owned by the plan, and the wrap issuer (bank or insurer) provides the guarantee.

• Group Annuity Contracts: These have no maturity date, with rates resetting periodically and managed by an insurance company.

Most contracts include an equity wash provision, which prevents arbitrage by requiring transfers from stable value to a competing option (like a money market fund) to first go to a non-competing option for a set period, usually 90 days.

Risks and Regulatory Oversight

While stable value funds offer many advantages, they are not without risks. These include credit, default, interest rate, issuer, liquidity, manager, market environment, regulatory, tax, and accounting risks. For example, contract risk arises if the provider defaults or fails to meet obligations, and event risk can occur due to layoffs or plan changes that affect benefit payments.

Stable value funds are subject to multiple layers of regulatory oversight. Corporate plans must comply with ERISA and are regulated by the Department of Labor’s Employee Benefits Security Administration (EBSA). State and local government plans are regulated by state law, while pooled funds and insurance contracts are overseen by federal and state agencies. All funds must adhere to accounting standards set by FASB (corporate) or GASB (government).

The Role of Stable Value Funds in Retirement Planning

Stable value funds play a vital role in helping participants manage risk and maintain income stability throughout retirement. Their design prioritizes capital preservation, liquidity, and consistent returns, making them a prudent choice for conservative investors and those seeking predictable income. By smoothing out the fluctuations of underlying bond portfolios, these funds help retirees avoid large losses during market stress and support long-term financial security.

Conclusion

For those seeking a reliable, low-risk investment option within their retirement plan, stable value funds remain a cornerstone of secure retirement planning. Their combination of principal protection, steady returns, and regulatory safeguards makes them an attractive choice for participants focused on long-term financial stability.

Bridgebay’s advisory services focus on:

• Retirement Plan Services

• Institutional Investment Consulting

• Treasury Management Consulting

Specialty services include RFP search and evaluations for pension consultants, OCIOs, multi-asset class managers, co-fiduciary managers, investment managers, diversity-owned managers, ESG managers, custodians, and recordkeepers.

Bridgebay does not manage or custody client assets, nor participate in wrap-fee programs. Clients include corporations, defined contribution plans, foundations, and not-for-profit organizations.