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How Stable Are Stable-Value Funds?

The “fine print” of many an investment product has come back to haunt investors over the years. The latest name on the watch list? Stable-value funds.

Despite their name, stable-value funds are far from risk free. Most contain restrictions on transfers and withdrawals – something many investors are unaware of until after the fact.

“Some of those restrictions may not be clearly communicated until a participant tries to make a transaction, and then they’re prevented from making it,” said Jeff Elvander, chief investment officer of a California company that consults with employers who offer defined-contribution retirement plans, in a Sept. 21 article by Bloomberg.

Stable-value funds – and the holdings they contain – also have a reputation for being opaque and complex. Unable to determine the quality of the underlying assets, investors oftentimes have no way of knowing the level of risk they are really taking on.

Stable-value funds refer to funds that pool one or more retirement plan’s assets, to insurance contracts and annuities that are offered within defined-contribution retirement plans like a 401K. In general, stable-value funds invest in short- to intermediate-term bonds and buy insurance on their portfolios. The contracts themselves are issued directly to a retirement plan sponsor or to its participants, and provide an interest rate that resets periodically.

In August 2011, stable-value funds returned 0.22 percent, compared with a 5.68 percent decline in the Standard & Poor’s 500 Index, according to the Bloomberg article. The returns are achieved, in part, by purchasing insurance contracts.

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