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Thursday, September 18, 2008

Stable-Value Fund Worries for 401(k) and 529 Plan Investors

The Wall Street Journal reported that stable-value funds are under scrutiny by worried investors with 401(k) and 529 plans that offer this option.

Fidelity defines a Stable-Value Fund as:
A stable value fund generally invests in investment contracts, certain types of fixed income securities (e.g., U.S. treasury bonds, corporate bonds, mortgage-backed securities, bond funds), and money market investments.

While the stable value fund tries to maintain a stable $1 unit price, the fund cannot guarantee that this unit price will be maintained and its yield may fluctuate
. The goal of the stable value fund is to preserve the participant's principal investment while earning interest income.
Mortgage backed securities are behind the melt-down on Wall Street!

Article excerpts:
It's not just money-market funds that are being scrutinized. Many 401(k) plan participants and employers are fretting about stable-value funds. These products, which are generally available only in defined contribution and 529 plans, typically invest in high-quality bonds and bank or insurance-company contracts that guarantee the value of the principal and offer relatively high interest rates compared with money-market funds.

The troubled insurance giant AIG is a major player in stable-value funds. The company is a provider of "wrap" contracts that protect the funds against loss of principal. AIG wraps roughly 10% of the stable-value fund assets tracked by Hueler Analytics, a stable value research firm. And that has many investors on edge.

But investors shouldn't lose much sleep over the developments at AIG, stable-value experts say. In stable-value wrap contracts, the fund assets are not held in the insurance company's general account. They're owned and controlled by the plan. And in stable-value funds that hold AIG wraps, AIG would typically be just one of many wrap providers. "If something were to happen to one of those wrap providers, it doesn't really change anything in the stable-value portfolio other than the manager has to decide to reallocate those dollars to a different wrap provider," says Kelli Hueler, CEO of Hueler Analytics.
Could these stable-value experts be related to the experts who missed the housing bubble and the effect its bursting would have on Wall Street financial firms such as AIG? I hope not.

I don't own any stable-value funds because I have never wanted to "trust an insurance company" to stay in business for me to have a good retirement. I use CDs, TIPS, GNMAs, Treasuries and a total bond fund for my core and explore portfolios. Why take excessive risk in the fixed income part of your investment portfolio when your rewards are only a few extra points of return above the safe investments I prefer? I take the risk in the stock market where the upside is unlimited!

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