Keeping Your Money Safe, with Caveats
The stock market’s recent gyrations sent retirement investors scurrying for shelter. Galliard Capital Management’s stable-value funds, offered in 401(k) and other retirement plans, drew more than four times the usual inflows in August. Investors in retirement plans administered by Wells Fargo moved $850 million into the funds that month, while at Aon Hewitt, a benefits manager, about $1 of every $5 transferred by plan participants was put in a stable-value fund.
Why the stampede? In unpredictable times, stable-value funds seem like an unbeatable deal, offering better returns than money-market funds without the volatility of stocks. The average stable-value fund yielded 2.55 percent at the end of August compared with 0.02 percent for the average taxable money market fund, according to data from Hueler Cos. and iMoneyNet. In August the funds had a total return of 0.22 percent, compared with the 5.68 percent decline in the Standard & Poor’s 500-stock index.
Yet “investors should realize they’re riskier than money funds” and may contain restrictions on transfers and withdrawals, says Jeff Elvander, chief investment officer for Aliso Viejo (Calif.)-based 401(k) Advisors, which consults for employers. Stable-value products come in several varieties and are engineered to preserve principal. Some stable-value funds hold short-term and medium-term bonds and buy insurance on their portfolios. This allows the funds to maintain principal and make interest payments when savers redeem their shares in down markets. Stable-value investments can also be insurance contracts such as annuities issued directly to a company plan. Overall there was about $540 billion invested in stable-value products as of December, according to the Stable Value Investment Assn.
Investors in stable-value funds generally face restrictions on how or when they can transfer or withdraw their money. For example, investors usually can’t move their money to competing investment options such as short- to intermediate-term bond funds for 90 days after withdrawing from a stable-value option. Elvander of 401(k) Advisors says that “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.” Retirement-plan administrators such as Fidelity Investments say these restrictions are disclosed in investment literature, even if participants don’t always read it.
The contracts that are issued directly to a company plan can be especially restrictive. People who use one of the stable-value annuities issued by TIAA-CREF may only withdraw or transfer funds according to a set schedule of 10 payments over nine years. Workers who quit a company that uses the product may take a lump sum within their first 120 days of leaving, during which they would pay a 2.5 percent surrender charge. Those limitations allow TIAA-CREF to offer a higher interest rate than it would be able to otherwise, says Phil Maffei, director of product management. The TIAA-CREF annuity yielded 4 percent in August.
In some instances the insurance may not protect savers. Major layoffs, mergers, and bankruptcies at an employer offering stable-value funds usually nullify a portfolio’s coverage. That’s because such events can trigger mass withdrawals, which the insurance isn’t designed to handle. Employees of Chrysler received 89¢ on the dollar when a stable-value fund the company offered liquidated in January 2009. Insurance on the fund, which was managed by Dwight Asset Management, didn’t cover the shortfall because of restrictions in the contracts. Kristel Garneau, a Dwight spokeswoman, declined to comment. “There’s a reason why they call them stable value, not guaranteed,” says Donald Stone, president of Plan Sponsor Advisors, a consulting firm. “I don’t think participants understand that.”