amid market mayhem retirement plan participants are pouring money into a 401k investment option that is widely seen as a safe haven yet comes with a convoluted set of potential pitfalls stable value funds which combine diversified bond portfolios with bank or insurancecompany contracts that help guard against market volatility took in 85 of 401k trading inflows in may according to the alight solutions 401k index looking at data going back to 2013 stable value funds have never attracted such a large percentage of trading inflows according to the index which tracks the daily trading activity of over 2 million plan participants with more than 200 billion in total assets right now “stable value is the vehicle of choice for capital preservation” in 401ks and other definedcontribution plans said steven mckay head of global defined contribution investment only at putnam investments where stablevalue assets climbed 87 between the end of 2019 and june of this year to 164 billion while stable value funds’ relatively smooth consistent returns can look appealing when both stocks and bonds are sliding their inner workings involve complicated tradeoffs and risks that vary widely depending on how the fund is structured in some of these products the underlying assets are owned by the retirement plan fees are transparent and there’s a diversified set of issuers providing the contracts that ensure smooth and steady returns in other stable value products the retirement plan owns nothing but a piece of paper a single insurance company owns the assets and provides the guarantee earning a spread that’s typically not disclosed to investors and exposing plan participants to considerable risk in the event that insurer goes belly up often “people don’t understand the risk they’re taking” in such products says chris tobe a retirement plan consultant and expert witness in litigation involving stable value funds investors should also be aware of trading restrictions and how rising rates may affect these funds stable value experts say as interest rates rise stable value returns will ultimately move higher but they may react more slowly than some other investments such as money market funds plan participants can generally sell their stable value holdings whenever they like but in many cases can’t move their money directly from stable value to a money market fund and at the plan level dumping a stable value fund isn’t easy in some stable value products it can take years for the plan to extract all its assets from the fund like money market funds stable value funds aim to preserve principal and generally let investors trade in and out at a steady price but while money market funds have to stick with shortterm debt stable value funds can invest in a broader swath of bonds that give them a substantial yield advantage over money funds that gap tends to narrow however when shortterm rates rise during the second quarter of this year the average stable value fund’s “crediting rate”–the interest rate applied to the principal and accrued income in a stable value contract–rose to 192 from 169 at the end of march according to investment analysis platform morningstar direct the average sevenday yield of money funds tracked by crane data’s crane money fund average jumped to 097 at the end of june up from 009 three months earlier learn how to shake up your financial routine at the best new ideas in money festival on sept 21 and sept 22 in new york join carrie schwab president of the charles schwab foundation in many retirement plans stable value is now the only conservative investment option these funds which are available only in definedcontribution plans such as 401ks and 403bs had about 918 billion in assets as of the first quarter of this year accounting for about 9 of all definedcontribution plan assets according to the stable value investment association an industry group but unlike many other 401k investment options stable value funds aren’t mutual funds and can’t be easily tracked and compared using ticker symbols stable value investments like money market funds have shown cracks during past periods of market turmoil in early 2009 congressional testimony former federal reserve chair ben bernanke defended the fed’s 2008 bailout of aig saying that if the insurance giant had been allowed to fail “workers whose 401k plans had purchased 40 billion of insurance from aig against the risk that their stable value funds would decline in value would have seen that insurance disappear” in recent years many retirement plans have shifted toward more transparent diversified stable value funds that don’t rely on insurance contracts provided by a single issuer but more than 40 of stable value assets remain in insurancecompany general account products where a single insurance company provides the guarantee according to the stable value investment association the bank and insurancecompany contracts wrapped around stable value funds allow investors to trade in and out of these funds at a relatively stable “book value” even as the market value of the underlying investments bounces around as rising rates have hurt bond portfolios the market value of the underlying investments in many stable value funds is now below the funds’ book value in many stable value funds the crediting rate calculation is designed in part to gradually close any gaps between market value and book value that slows down any increase in these funds’ crediting rates as interest rates rise generally the fed’s interestrate increases are quickly reflected in money market fund yields while “stable value will follow the general direction of interest rates but with a lag” says michael norman copresident of galliard capital management an allspring global investments subsidiary that manages stable value portfolios the current gap between market value and book value in many stable value funds also underscores the importance of having highquality wrap contract issuers protecting the portfolio if a stablevalue fund’s investors suddenly run for the door and the fund is forced to sell its bonds at depressed prices wrap contract providers can step in to ensure investors receive book value in the more transparent stable value products assets are owned by the plan and investors can generally see a clearly disclosed expense ratio and a breakdown of the underlying bond holdings these funds are typically run by an investment manager either as an account managed for a single plan’s participants or as a fund that pools assets from multiple plans the contractual guarantees are diversified across multiple issuers–generally at least four or five but sometimes a dozen or more if the financial strength of any one issuer starts to look wobbly other issuers can quickly step in to ensure the whole portfolio remains protected fees for the insurance protection in these products are often less than 02 although widely varying fees for investment management and recordkeeping can be added on top of that says daniel farkas director of manager selection at investmentresearch firm morningstar in stable value products provided by a single insurance company the risks and costs can look very different in these products the assets are owned by the insurance company and held either in a segregated account or the insurer’s general account insurancecompany general account products are still the largest stablevalue category by assets according to the stable value investment association in these products “you own no securities zero nothing just a contract” tobe said the insurance guarantees are only as strong as that single issuer and if questions arise about the issuer’s financial strength plans can’t quickly or easily jump ship it may take several years for a plan to extract itself from the product the tradeoff assets in these products can be invested for the longer term potentially leading to better returns for investors but that’s not always the case the insurance company pockets the difference between the investment earnings and the rate it gives investors that “spread” generally isn’t disclosed but it’s often 2 or more stable value experts say some generalaccount products are offering a crediting rate of only about 1 farkas says while their longerterm investment returns are likely considerably higher concerns about the murky costs and credit risk of insurancecompany general account stable value products have triggered recent 401k litigation in a complaint filed last year in a federal court in tennessee participants in a 401k plan offered by autozone azo  the auto parts retailer alleged that the plan “failed to monitor and to replace an obscenely overpriced prudential stable value fund” which was the plan’s largest investment by assets the prudential guaranteed income fund an insurancecompany general account product exposed the plan’s participants to singleentity credit risk and charged them 2 percentage points more than the same type of product that prudential offered to other similar retirement plans costing participants more than 13 million in retirement savings the complaint alleged autozone did not respond to requests for comment in a court filing the company acknowledged that the prudential stable value fund was an investment option in the plan but denied the other allegations prudential financial pru  which did not respond to a request for comment earlier this year sold its retirement business including its stable value products to retirementplan provider empower prudential was not named as a defendant in the case an empower spokesman declined to comment on the case saying “we are not involved” some stablevalue experts say that 401k plans’ continued use of insurancecompany general account stable value products deserves some scrutiny given the potential drawbacks and the widespread availability of cheaper diversified stable value funds “it just depends on all the options available” to the plan farkas said the general account products “seem inferior in a lot of ways but they have generally delivered on what they’ve promised” gina mitchell president of the stable value investment association said the plan sponsors using those products “tend to be pretty sophisticated” and weigh the tradeoffs including the potential returns and expense