Inside Stable Value Funds
Most qualified retirement plans offer a capital preservation option that allows participants to invest with the least risk and the steadiest growth rate. The two most popular capital preservation options are money market funds and stable value funds.
The approaches used in creating investment products that feature those options have significant differences.
For example, insurance companies are the typical manufacturers and guarantors of stable value funds.
On the other hand, money market funds invest in U.S. Treasury securities, backed by the U.S. government’s full faith and credit. Some commercial banks even offer money market funds with some or all of a participant’s account balance guaranteed by the FDIC.
In low-interest rate environments, stable value funds can have a marginally better rate of return than money market funds. However, insurance companies frequently include a “lockup” clause in their stable value funds. Such a provision may restrict the rate of withdrawal. An illustration would be the release of a distribution request in five equal annual installments, while a mutual fund would trade daily on the money market with no liquidity restrictions.