Currently, stable value funds found in 401 (k) pension plans yield 6%, according to Hueler Companies. Over the past three years, stable value funds have grown at a 6% annual rate. Money has been flowing into stable value funds at a rapid clip. Total assets now stand at $55 billion. Twenty-five percent of all 401 (k) pension plan assets are invested in stable value funds, Hueler adds.
"We've seen a pick-up in money flowing into stable value funds over the past year," Heuler says. "There is a definite change in market sentiment since last March and assets are continuing to increase."
There is no free lunch with stable value funds. There are redemption fees if the investor cashes out early. Also, unless interest rates rise, stable value funds are apt to pay lower yields in the future.
Cash flows also affect the yield on stable value funds. Large cash inflows may result in stable-value funds investing cash at lower rates. And if rates shoot up, investors may switch to higher-yielding investments. So the funds may be forced to sell securities if they don't have enough cash on hand to meet redemptions.
The safety of the stable value fund is only as good as the financial strength of the insurance company backing it. Despite large capital losses in the insurance industry and recent downgrades in the financial strength ratings of some firms by A.M. Best, Standard and Poor's and Moody's, Heuler says the insurers issuing stable value funds are the financially strongest in the industry.
"I haven't seen any defaults of stable value funds in the 20 years I've been following the industry," Heuler says. "Executive Life and Mutual Benefit did default on their GICs years ago. But the problems were worked out. There was a delay in interest payments, but no one lost principal."