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Its Time to Tune-up
Your Stable Value Fund!

As noted elsewhere in this issue, with the Wall Street Journal discussing when and where to "run for cover" from stock market risk and the 1998 AIMR Annual Conference projecting a gloomy long range economic forecast, 401(k) plan participants may be looking to their stable value option with even more interest in the future than in the past. Consequently, now is the time to consider giving your GIC/stable value investment option a tune-up so that it can do its best to fulfill the heightened expectations of your plan participants.

No two stable value funds have experienced the same cash flows and they may have somewhat different investment parameters, but if your plan’s

Peter Bowles, CEBS, President

Peter E. Bowles, President
Fiduciary Capital Management, Inc.

GIC/stable value fund has experienced a return over the past 12 months which is less than the average pooled stable value fund as reported by IOMA’s DC Plan Investing, you owe it to your participants as a plan fiduciary to know why and how the return can be improved.

No matter whether your plan uses a separately managed account subject to its own unique investment guidelines or one of the many pooled funds, the IOMA pooled fund average is a helpful benchmark since it represents a universe of readily available alternatives. The lowest return reported by DC Plan Investing for the 12 months ending 3/31/98 was 5.37% in stark contrast with the highest return of 7.25%. The average pooled fund returned 6.43%.


If your separately managed or pooled fund was below this average return, it could have a dramatic effect upon the future retirement savings potential for your plan participants as they direct increasingly more of their assets to stable value as they approach and then move into retirement. For example, a participant with a $100,000 account balance would have $168,721 in ten years if it grew at the 5.37% low rate of return and by contrast as much as $186,484 if it grew at the average return of 6.43%. Even more startling is the fact that this same $100,000 would grow to $201,360 if it were invested at the 7.25% rate of return.

What are some of the factors that can affect fund performance? In theory, the longer the weighted average maturity of the fund, the higher the return should be. In fact of the 27 pooled funds followed by IOMA representing $23.1 billion in stable value assets, nine funds with weighted average maturities longer than the average also have 12 month returns which are higher. However, another four of the longer funds have returns which are lower than the average, and the highest returning fund, with a 12 month return of 7.25%, had a weighted average maturity of only 2.07 years which is less than the average of 2.24 years. The lowest returning fund is the shortest with a weighted average maturity of only 1.19 years, but two of the other relatively shorter funds, with average maturities of less than two years nevertheless have above average 12 month returns. So it is fair to say that a longer fund is more likely to perform better, but there are other factors at work as well which have a significant effect upon performance.

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