What’s the difference between stable value and money market funds?

Both money market and stable value funds aim to provide 401(k) participants with preservation of principal and income. But they seek to achieve this objective differently. If you’re a plan sponsor or financial professional considering which to put in a 401(k) lineup, you should understand the differences between them.

Money market funds are typically low risk and liquid

Most investment professionals consider money market funds a safe investment because they pay modest interest and their share price (net asset value) doesn’t fluctuate. In a sense, money market is like cash.   

But a money market fund isn’t quite cash. It’s a portfolio of very short-term, high-quality bonds and bond-like investments issued by either the government or by a high-grade borrower, such as a corporation.¹ Usually, the investments inside money market funds are easy to sell, making them an ideal, low-risk, and short-term holding.

Most money market funds work in a straightforward way. Because only a fraction of a money market fund’s investors needs access to their money on a given day, money market funds use proceeds from maturing bonds or investor deposits—much like a bank does—to meet withdrawal requests. This design allows money market funds to maintain a fixed net asset value and daily liquidity at the same time.

Stable value funds generally provide a higher return

Stable value funds are also viewed as safe investments. Like money market, stable value pays interest and offers a fixed net asset value. Unlike money market, however, stable value does this by using insurance or bank-backed guarantees and longer-term, high-quality bonds.

Guarantees can come from one insurance company (in an insurance company stable value fund) or from many (in a commingled stable value fund). The longer-term bonds inside stable value are, likewise, managed by either an insurance company or by one or more investment managers. With both insurance company and commingled stable value funds, the fixed share price depends on the investment experience of the underlying portfolio, manager competence, and the cost of the guarantees from the insurance company or companies.

Although stable value funds offer daily liquidity to participants, they’re potentially less liquid than money market funds at the plan level. For example, if a 401(k) plan removes a stable value fund from its lineup when that fund’s market value is less than its contract (book) value, the fund may be subject to a market value adjustment. And this might cause participants to incur modest losses. Alternatively, a plan sponsor can elect to wait anywhere from 12 to 60 months, depending on the contract, until a market value adjustment is no longer required.

Historically, stable value has rewarded investors with its potential plan-level liquidity—and by maintaining the type of portfolio that illiquidity allows it to hold—with returns higher than those of money market.² While there’s no guarantee that its higher returns will persist or that past performance is an indicator of the future, stable value’s structure may continue to provide higher returns relative to money market.

Make the right choice for your 401(k) plan

Money market and stable value funds present retirement plan fiduciaries with similar principal preservation options, but with important structural differences. These differences allow stable value to provide higher income, while government money market funds offer simpler, more liquid, but potentially lower-yield, portfolios. Either or both (if allowed) might be right for your plan, depending on the needs of your participants and on your goals.

1 The money market funds in 401(k) plans are invested entirely in government securities—the safest of short-term investments—for regulatory reasons. 2 “Stable Value at a Glance,” Stable Value Investment Association, stablevalue.org/knowledge/stable-value-at-a-glance, March 31, 2020.

For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges, and expenses before investing. The prospectus contains this and other important information about the investment option and investment company. Please read the prospectus carefully before you invest or send money. Prospectus may only be available in English.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

Stable value portfolios typically are invested in a diversified portfolio of bonds and entered into wrapper agreements with financial companies to prevent fluctuations in their share prices. Although a portfolio will seek to maintain a stable value, there is a risk that it will not be able to do so, and participants may lose their investment if both the fund's investment portfolio and the wrapper provider fail.

There is no guarantee that any investment strategy will achieve its objectives.


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