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.
Comparing stable value and money market funds
The chart below highlights key distinctions to help you understand how each option may fit within your retirement plan.
Feature | Stable value fund | Money market fund |
Availability | Primarily tax-qualified defined contribution, defined benefit, and 529 college savings plans | Brokerage and retirement accounts, including IRAs, 401(k)s, 403(b)s, and 457(b)s |
Underlying investments | Invests in short- and intermediate-term high-quality bonds paired with insurance or bank-backed contracts | Invests in short‑term, high-quality debt, such as U.S. Treasuries, CDs, and commercial paper |
Objective | Capital preservation that aims to deliver consistent positive returns and long-term income | Capital preservation with cash-like stability and short-term income |
Plan complexity | More complex due to contractual obligations | Relatively simple and transparent |
Liquidity | High for participants; plans may have restrictions | High, typically without participant or plan restrictions |
Return potential | Historically higher with yields contractually set and comparable to intermediate bonds, although not guaranteed | Interest earned is typically lower and closely correlated to short-term interest rates |
Risk | Low | Low |
Regulatory body | Department of Labor under ERISA, banking and insurance regulators (for wrap contract providers), and other applicable regulators |
Collective investment trusts are offered through banks or trusts overseen by state or federal bank regulators and are subject to the federal laws governing retirement plan fiduciaries. Mutual funds are offered through registered investment companies overseen by the SEC.
Fund structure
Stable value funds invest in longer-duration, high-quality bonds, typically with an average duration of two to four years. The bond portfolio is then paired with insurance- or bank-issued contracts.
These contracts allow participants to transact at book (contract) value rather than market value. Book value reflects the value used for participant transactions under the contract and is generally designed to remain stable over time. Market value, in contrast, reflects the value of the fund's underlying investments if sold on the open market, which fluctuates daily as interest rates and market conditions change.
Most money market funds work in a straightforward way. Their portfolios comprise very short duration (under one year), high-quality bonds and bond-like investments issued by either the government or by a high-grade borrower, such as a corporation. Usually, these bonds are easy to sell, making them a low-risk investment option with cash-like liquidity.
Because only a small percentage of investors typically make withdrawals on a given day, money market funds use proceeds from maturing securities and new deposits to meet redemption requests, much like a bank. This structure allows money market funds to maintain a fixed net asset value and daily liquidity at the same time.
Plan-level liquidity
Stable value and money market funds both offer daily liquidity to plan participants. Stable value funds, however, can be less liquid at the plan level. This means a plan may be unable to move large amounts of money out of the fund or exit it without restrictions, delays, or pricing adjustments.
For example, if a plan removes a stable value fund when its market value is below its book (contract) value, a market value adjustment may apply. This could result in modest participant losses upon fund termination. To help mitigate this risk, plan sponsors typically have options, including phasing out the fund over a contract-specified period, usually 12 to 60 months, or waiting until the fund’s market value approaches its book value.
Return potential
Historically, stable value funds have delivered higher returns than money market funds while maintaining low volatility. Because stable value funds invest in intermediate-term bonds, they typically benefit from higher yields than very short-term securities. In addition, stable value crediting rates are fixed and periodically reset, helping to smooth the effect of short-term interest rates and market volatility on participants' balances. By contrast, money market yields are typically lower and closely track short-term interest rates, which can change quickly in response to the federal funds rate.
Choosing what’s right for your retirement plan
Stable value and money market funds present retirement plan fiduciaries with similar principal preservation options, but with important structural differences. These differences allow stable value to deliver higher income potential, in exchange for a longer investment commitment, while money market funds offer simpler, cash-like liquidity. Plan sponsors can work with their financial professional to determine which fund, or both, if allowed, best suits their plan’s objectives and participants' needs.
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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.
Important disclosures
Important disclosures
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.
MGTS-P 42609 GE 07/20-42609 MGR0622201219573