Investors, especially in retirement accounts, are pouring money into so-called “stable value funds” but the stability of those funds is not as advertised. The funds are often sold as higher-yielding money market funds, but they lack the safety and stability of a money market fund. Also, the higher-than-money-market yield and stability come at a price – locking up investors’ money and imposing hefty surrender charges on certain withdrawals.
Stable value funds invest in short to intermediate term bonds and buy insurance to smooth out returns. The smoothing is meant to manage and cover investor withdrawals. The stability comes from the insurance. The insurance comes at a cost and comes with restrictions that limit and can even eliminate the insurance coverage.
In exchange for the coverage, insurers impose restrictions on how and when savers may transfer or withdraw their money. There are also restrictions on what investors can do with the money after it is withdrawn. For example, investors usually are not permitted to move their money into a different investment option (such as short term bonds) for 90 days after the money is withdrawn from a stable value fund.
The withdrawal restrictions can be draconian. Savers in one stable value fund issued by TIAA CREF reportedly are limited to a schedule of ten payments over nine years. Workers who quit the company that uses the fund may receive a lump sum distribution less a 2.5% surrender charge.
But the insurance coverage is limited and can even vanish. It usually does not cover major corporate changes such as layoff, mergers and bankruptcies that lead to large withdrawals. What’s worse, some insurance contracts allow the insurer to terminate all coverage for any reason with 90 days notice. As a result, the supposed stability can vanish. If we experience the worldwide recession everybody is worried about, expect that stability to vanish as insurers do not to honor their guarantees.
In sum, the name “stable value fund” is misleading and does not convey the actual complexity and risk of these alternative investments. They are not suitable for safe money investments. Investors seeking safety should beware and not invest these products.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.