Article
Stable value funds and money market funds offer retirement plan participants the lowest level of risk (and investment returns) among investment options. Collectively, they fall into a general category, sometimes called capital preservation funds.
Overview of Stable Value Funds
Generally, a stable value fund offers a better return than a money market fund, albeit with less disclosure. Stable value funds may be branded with names like:
- Capital accumulation funds,
- Principal protection,
- Guaranteed funds,
- Preservation funds,
- Guaranteed investment contracts (“GICs”), and
- Group annuity contracts.
Stable value funds impose liquidity restrictions, often called “lockup provisions.” Assets in such funds may be unavailable for withdrawal ranging from 90 days to up to seven years at the fund issuer’s discretion.
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 throughout the fund.
Stable value funds that carry a credit issuer’s rating of AAA are said to have an extreme capacity to meet their financial commitments.
Be sure to document the rationale your committee used when deciding to add a capital preservation fund containing a lockup provision to your retirement plan’s investment options.
Money Market Fund Characteristics
In a retirement money market account, deposits are placed in low-risk investments such as certificates of deposit (CDs), Treasury bills, and short-term commercial paper.
Unlike stocks and bonds, money market account balances held at a bank are FDIC-insured up to $250,000 per depositor, per institution.
An overall retirement portfolio’s diversification strategy may include using a retirement money market account, a conservative investment. Whatever the bond or stock market’s state, its value is anticipated to hold steady.
Generally, money market funds have no lockup provisions.
Summary
A capital preservation fund’s investment strategy is characterized by a conservative approach to risk management and asset allocation, with an emphasis on minimizing the potential for loss.
