Understanding the Different Types of Stable Value Funds Available for Retirement Plans
Written by: Terry Anderson
Stable value funds are an important investment option for retirement plans, providing stability and low volatility for investors. These funds typically invest in a diversified portfolio of high-quality fixed-income securities, such as bonds, and aim to preserve principal while providing competitive returns. There are several types of stable value funds available for retirement plans, each with its own characteristics and investment strategies.
Traditional Stable Value Funds
Traditional stable value funds are the most common type of stable value fund. They typically invest in high-quality fixed-income securities, such as bonds, and seek to maintain a stable net asset value (NAV) of $1 per share. These funds typically have a conservative investment strategy, with a focus on capital preservation and low volatility. Traditional stable value funds may also offer insurance guarantees that protect investors against losses due to default or market fluctuations.
Synthetic Stable Value Funds
Synthetic stable value funds use derivatives to create a stable value investment option. Instead of investing in actual fixed-income securities, these funds invest in a combination of interest rate swaps, futures contracts, and other derivatives to mimic the performance of traditional stable value funds. Synthetic stable value funds may offer higher returns than traditional stable value funds, but they also carry more risk.
Money Market Funds
Money market funds are a type of stable value fund that invests in short-term fixed-income securities, such as Treasury bills and commercial paper. These funds are designed to provide investors with a stable NAV, typically $1 per share, and low volatility. Money market funds may offer slightly higher returns than traditional bank savings accounts, but they also carry some risk.
Guaranteed Investment Contracts (GICs)
Guaranteed investment contracts (GICs) are a type of stable value fund that is backed by an insurance company. GICs offer a guaranteed rate of return and are typically used by large retirement plans to provide a stable value option for their participants. GICs may offer higher returns than traditional stable value funds, but they also carry the risk that the insurance company may default on the guarantee.
Bank Collective Trust Funds
Bank collective trust funds are another type of stable value fund that invests in a mix of fixed-income securities. These funds are managed by banks and are typically used by larger retirement plans. Bank collective trust funds may offer slightly higher returns than traditional stable value funds, but they may also carry more risk.
Stable value funds are an important investment option for retirement plans, providing stability and low volatility for investors. There are several types of stable value funds available, each with its own investment strategy and risk profile. Understanding the different types of stable value funds can help investors make informed decisions about their retirement plan investments. It is important to carefully consider the risks and benefits of each type of stable value fund before investing.