A Safe Home For Your Nest Egg
When it comes to investing, who doesn't like a sure thing? That's the appeal of stable value funds, which aim for a constant asset value and pay a predictable annual rate of return --currently averaging 6.45%.
Until December, the only way you could get a stable value fund was if your employer offered one in a retirement or profit-sharing plan. But with contributions to individual retirement accounts at record highs, mutual-fund companies are now lining up to offer stable value investments that accept IRA cash. Bankers Trust has one, and Dreyfus, Oppenheimer, and Morley Capital Management, among others, will soon. The funds are closed to regular investors the management companies want to avoid because they can take their money and run at any time. But "ultimately, these products will be made available to the retail market," says Karl Tourville, whose Galliard Capital Management in Minneapolis is preparing to offer one.
Stable value funds used to invest only in guaranteed investment contracts (GICs), which are promises by insurance companies to repay principal plus a fixed interest rate by a specified date. Now, they also buy government bonds and high-quality asset-backed securities and corporate bonds, says Robert McCormish, whose Dreyfus Retirement Income fund hopes to accept IRA money by spring.
What provides the stability? An insurance policy, or "wrapper." Purchased from a bank or insurer, it protects investors' principal and locks in a return. Because stable value funds replace maturing investments with new ones bearing slightly different interest rates, investors' returns can fluctuate, though rarely by more than 10 basis points a year, says Kelli Hustad Hueler, whose Hueler Cos. in Minneapolis tracks about 18,000 stable value instruments. That predictability made stable value the top choice of 401(k) investors pulling money out of stocks on Aug. 31, when the market lost nearly 513 points, says benefits consultant Hewitt Associates. Although the concept's popularity has suffered since a few insurers--and the GICs they backed--went under in the early '90s, stable value still accounts for 16% of the more than $1 trillion in 401(k) plans, says Spectrem Group. To guard against a bust, look for average credit ratings of AA or better on both a fund's holdings and the companies insuring them.
Stable value funds are no substitute for stocks--they don't grow. But they earn 1.5 to 2 percentage points more than money-market funds, Hueler says. And Wayne Gates, general director at John Hancock Financial Services, maintains that they offer better diversification than bonds, which are more likely to rise and fall with stocks. He says investors who replace bonds with less volatile stable value funds can devote more of a portfolio to stocks without increasing overall risk levels. Over the past decade, Hueler's stable value index even comes close to the returns on taxable U.S. bond funds.
The price 401(k) investors pay for stable value is restrictions on transferring assets into money-market funds. For IRA holders, the downsides are stiff redemption fees and expense ratios that average 1% a year, vs. 0.3% for 401(k) plans. But if the concept proves as popular for IRAs as it is with 401(k)s, those expenses should fall as competition grows.