Stable-value funds offer low-risk returns that beat inflation and should be considered as a safe-haven for your 401(k) plan. Stable-value funds typically invest in medium-maturity bonds with maturity dates ranging from two to four years. The longer maturity of the debt held by stable-value funds allows them to deliver higher yields than money-market funds. But the longer maturities also increase risk and that is why stable-value funds have higher returns. To minimize risk, institutions use insurance "wrappers" from multiple insurers to cover the uninsured portion of the stable-value fund portfolio.
Although stable-value funds offer higher returns than money-market funds, they do come with certain restrictions. Retirement plans do not allow you to transfer money directly from a stable-value fund to a money market fund or to any short-term or intermediate-term bond fund. Instead, you must move money into a non-competing fund such as a stock fund, for at least ninety days.
Stable-value funds have a lot of pluses but one negative is that you will not get rich from them. They are more conservative investments than traditional mutual funds and more aggressive than traditional money market funds. Investors should earmark at least 20% of their 401(k) funds to stable-value funds with the balance invested more aggressively or in accordance with your risk tolerance investment style.
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