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Why is Stable Value Attractive ?

"Preservation of capital" is probably the most significant reason a participant elects to invest in a stable value fund. The stable value fund distinguishes itself from the variety of investment options offered under the 401(k) plan for this reason. Unlike company stock, equity and bond funds, the stable value fund is carried at book value versus market value. Book value insulates the participant from the volatility of market fluctuations caused by movements in interest rates, changes in credit ratings, stock earnings, economic forecasts and the wide variety of other factors which can cause interim price volatility.

Why would a participant want to preserve capital? For risk averse investors, stable value funds permit a participant to reduce the anxiety of sudden changes in his/her retirement assets. Participants wanting to preserve the earnings from riskier investments, especially as retirement looms, also find increasing their commitment to the stable value option to be very attractive.

Another reason participants are most likely to invest in a stable value fund is the attractive level of returns, which compare favorably to those of bond funds but without the interim volatility of returns. A well laddered portfolio with regular dollar cost averaging into the market will produce consistent, reasonably predictable, returns.

How do participants determine if their stable value fund offers as attractive a return as it should? Most participants compare the return of the stable value fund to a return they could have received on money deposited at the local bank in a savings or money market account, or even in a Certificate of Deposit. Occasionally, money market funds are offered under a 401(k) plan but are not as attractive as stable value funds considering there is as much as a 150 basis point give up in rate. Additionally, stable value funds have even less volatility than cash equivalents.

As an investment manager, FCM’s goal is to manage the stable value fund in order to assure that the participant goals of preservation of capital and attractive returns are met. Monitoring credit quality of the traditional GIC issuer and the assets in the synthetic investment, managing duration of the investment along with its relation to credit, limiting allocation to a specific industry or investment product and negotiating favorable contract terms are all part of the investment strategy in preserving capital. FCM employs an independent proprietary credit rating process which tends to be more conservative than the rating agencies, has an overall portfolio rating of AA/AA+, and has experienced no loss of principal in any portfolio.

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