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Are Stable-Value Funds Safe?
For the first time ever, one of these funds lost money. But it doesn't mean widespread problems.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
January 15, 2009
I read that a stable-value fund that Invesco manages for Lehman Brothers' 401(k) plan lost money. How safe are other stable-value funds?
It’s true that an Invesco fund is the first stable-value fund ever to lose money. But the fund's 1.7% decline in December 2008 is peculiar to the situation at the now-bankrupt Lehman, and it probably doesn't portend wider troubles in stable-value funds, which hold more than $400 billion, almost entirely in retirement accounts.
Stable-value funds generally invest in high-quality bonds with maturities of two or three years. That is a conservative strategy. In addition, the funds buy insurance "wrappers" that guarantee the principal. But two developments after Lehman's abrupt bankruptcy in September undermined the stable-value fund in the company's retirement plan.
First, many former employees withdrew money from their 401(k)s, forcing the fund to sell bonds at a loss. In addition, contracts with three of the Lehman fund's seven insurers specified that their wrappers would become invalid in the event of bankruptcy.
Generally, stable-value funds negotiate new contracts in the event of a bankruptcy and maintain insurance coverage, but Lehman didn't have time to renegotiate the contracts. "It is difficult to imagine a worse case than what happened with Lehman," says David Babbel, professor emeritus at the University of Pennsylvania’s Wharton School and author of a study on stable-value performance.
The average stable-value fund returned about 4% in 2008. After the 1.7% hit in December, the Lehman fund gained 2.2% for all of 2008. An Invesco spokesman says that all of the fund's assets are now insured against loss and that the December write-down is likely to be a one-time event.
Reader Comments (1)
Posted by: Robert Hall at 01/16/2009 12:37:52 PM
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