This Low-Risk 401(K) Investment Is Guaranteed to Not Lose Your Money. Here's When It May Make Sense to Use

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  • Stable value funds are typically available only through defined contribution plans such as a 401(k).
  • This option generally provides more income than a money market fund.
  • However, stable value funds do face inflation risk, and there's a variety of other things to consider before you put money in one.

For investors nearing retirement or already retired who need the certainty of cash but want to squeeze out a bit more yield, a certain investment in your 401(k) plan may fit the bill.

It's called a stable value fund (or something similar) and typically is available only through defined contribution plans such as a 401(k). In simple terms, these low-risk funds aim to protect your principal and give you a bit more in earnings than you'd get in a money market fund.

However, they also don't provide much growth, so they come with inflation risk — which means the value of your money could lose purchasing power. That makes these funds largely impractical for young savers whose retirement is decades away.

And because the fund is in your 401(k), you'd generally need to be at least age 59½ — when penalty-free withdrawals from retirement accounts can begin — to use the fund as a cash alternative. 

"They're mostly appropriate for investors who are very risk-averse and looking for a slightly higher return than they'd get with cash," said Amy Arnott, a portfolio strategist at Morningstar. "Their primary role is protecting principal."

Roughly $908 billion is invested in these funds, according to the Stable Value Investment Association. Older investors are more likely to use them as they head toward retirement: Among 401(k) participants in their 60s, about 9.1% of assets are invested in stable value funds, research from the Employee Benefit Research Institute shows. That compares to 1.3% of investors in their 20s.

"Where I like to use them is if someone is retiring imminently," said certified financial planner Ken Nuttall, chief investment officer at BlackDiamond Wealth in West Grove, Pennsylvania. "It's more like cash."

Advisors generally recommend that retirees have enough cash to fund their income needs for six to 12 months so they aren't forced to sell investments in a down market. 

Stable value funds generally use short- to intermediate-term fixed income investments, but differ from bond funds in that the share price is a constant $1. There's also an insurance component to these funds, assuring the per-share value won't go below that amount — which translates into no loss of principal regardless of what the broader markets are doing.

In comparison, investing directly in bond funds comes with interest rate risk — as rates rise, bond prices fall. This year, amid rising rates, short-term bond funds have lost about 4% year to date, Arnott said.

"Stable value funds' net returns are up about 0.4% year to date versus cash, which is basically flat," Arnott said. "They might have a slight advantage over money market funds, but not enough to keep up with inflation."

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Inflation is running at 8.3% year over year, according to the most recent measurement from the U.S. Bureau of Labor Statistics. Although that's down slightly from the March peak of 8.5%, it is still the fastest annual pace in about four decades and far above the Federal Reserve's target of 2%

However, there are a few things to know beyond these funds' inflation risk. For starters, the cost varies widely among them.

"The range for funds in our database goes from as little as 20 basis points [0.2%] to as high as 1.5%," Arnott said. "So you definitely want to check out [the cost] because that comes out of your income stream in a stable value fund."

You also should limit the portion of your portfolio that's in a stable value fund.

"Use them to represent the cash portion of your account — say, 5% to 10%," said CFP Tim Sobolewski, president of the Financial Planning Center in Amherst, New York. "The problem is when someone dumps all of their money in one, because they won't beat inflation."

Additionally, if you are using a stable value fund instead of a money market fund in your 401(k), be sure you understand whether the provider places limits on liquidity. For example, some funds may restrict your ability to transfer your holding to another investment in your 401(k) plan.

Also, while these funds guarantee to preserve your investment, that assurance would go out the window if, say, the insurance company were to default or the 401(k) sponsor (i.e., your company) were to go bankrupt, Arnott said.

However, in terms of preserving principal, these funds have lived up to their promise, she said.

"This isn't an area where we've seen a lot of losses," Arnott said.

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