It’s getting very hard to watch my 401(k) continue to drop with the ever (seemingly) falling market. It’s really taking a toll on the accumulated compounded interest and it is going to be really tough to regain some of the interest-on-interest, if ever. I’m toying with the idea of moving all my 401(k) holdings into a Stable Value Account until the market turns around as a “holding station.” Is this a smart move? -Mark
 
The market’s recent volatility requires investors to have a strong stomach, but investing in a stable value fund can offer some relief.

The majority of Stable Value Accounts or Funds (SVF) are made up of short-term bonds protected by insurance contracts, that typically are shielded from choppy markets. The funds typically offer returns a couple percentage points higher than an average money-market fund.

“[An SVF is] typically offered through 401(k)s. You typically don’t need to worry about a loss of principal, but you’re getting a higher return than a money-market fund,” explains David Zuckerman, principal and chief investment officer at Zuckerman Capital Management LLC.

“However, in the world of investing, you almost never find any return for free, so because there is more return than a money market fund, there is also going to be a little more risk than a money market fund.”

Like other investment vehicles, an SVF has annual fees. “In most larger 401(k)s, you’re probably going to see anywhere from 25 basis points on up,” says Jeff Rose, certified financial planner and writer of the blog Good Financial Cents. “I would say anything greater than 1% would be pretty excessive on a stable value fund.”

Zuckerman points out that the interest rates in an SVF reset periodically.

“If you are able to access a SVF that hasn’t yet reset when rates have dropped, you can actually obtain a pretty favorable rate of interest,” says Zuckerman. “That just depends on the individual’s SVF. They are a way to find a little bit more yield in this extremely low interest rate environment.”
You may also face the risk of falling and rising interest rates and bond values.

“[Stable Value Funds are] not going to be as interest-rate sensitive in a longer term type bond or bond fund, but it’s still something that takes the impact,” Rose says.

“I think that with any slightly more exotic type of investment, it’s really important to assess the actual cost, which can be difficult to do depending on how complicated the contract provisions are,” says Zuckerman. “I think that the biggest risk is that you wind up overpaying for protection.”

Who Should Invest in a SVF

Determining if a SVF makes sense for you depends on your age, appetite for risk, other investments and future plans.

“I think you could make the case that most anyone would need some percentage of their 401(k) portfolio in a Stable Value Fund,” says Rose. “Most anyone would need to have some protection there, to have some kind of investment toward short term. You’re not going to make anything—it’s more there for protection on the downside. It’s more like your safety net.”

Investments Within a SVF

Zuckerman says the risk associated with SVFs stem from the investments that make up the fund, which are usually referred to as Synthetic Guaranteed Investment Contracts (SGICs).

“An SGIC [describes] assets held in a trust for a company or the institution that buys the contract,” Zuckerman says. “The contract acts like a ‘put option’ for them. If something happens and the market value of the securities that they’re held in falls below what it needs to be, then they can, depending on the terms of the contract, either make them whole, or swap the market value for a pre-determined amount of cash.”

Most SVFs are made up of investments from the corporate, government, and mortgage bonds sectors, according to Zuckerman. The insurance “wrapper” protects the investment if the SVF falls below a set rate of return and makes up the difference.