Defined Contribution
Stable Value
Funds Today
What are They and How Should
Performance Expectations be
Managed?
By Catherine Tocher
S
table value funds (SVF) are
typically short- to intermediateterm, high-quality, fixed income
bond funds. They represent a low-risk
source of diversification in a fund lineup
for retirement plans and are considered
a fixed income alternative to money
market funds and bond mutual funds.
SVF are deemed a good alternative to
bond mutual funds because of their
investment objective to seek stable
returns across various economic and
interest rate environments. They are
an alternative to money market funds
because they typically offer higher
credited rates and relatively lower
risk compared with other investments
generally.
How can the returns be stable AND
be higher than money market fund
yields through rate cycles?
18 | SPRING 2014
The “funds” are “wrapped” with contracts
issued by banks or insurance companies
that help smooth out the returns of the
underlying portfolio of bonds. Losses
and gains of the underlying investments
are spread over the duration of the
fund. The investment objective of
SVF is to provide capital preservation
and predictable, steady returns via the
credited rate smoothing mechanism.
Today, investors may be hesitant to
allocate to SVF relative to equities.
It’s not surprising following a year
when the S&P 500 returned in excess
of 30%, the Barclay’s Aggregate Index
returned negative -2.0 percent, and
SVF credited rates ranged between
0.3 percent and 2.1 percent. However,
this is comparing apples to oranges.
What’s relevant is comparing SVF
to money market and bond mutual
funds. It is equally important to remain
committed to the principles and benefits
of diversification, being mindful of
unique age and income-based needs.
Most investors should diversify across
a broad range of asset classes, holding
portfolios that include stocks and bonds
as well as low-risk investment choices
like SVF. Quantifying the impact of
diversification through market cycles
highlights the potential benefits, with
2008 representing a worst-case scenario
for many portfolios that held a significant
equity concentration.
What I get asked most often is, when
are crediting rates going to increase
… meaningfully?
We believe there may be a gradual
upward movement in interest rates as