In a retirement plan investment menu, money market and stable value funds can provide retirement plan participants with conservative investment options designed to preserve an account’s principal and income. There are nuances, however, in how they achieve that objective. For retirement plan fiduciaries, understanding the differences between money market funds and stable value funds is a foundational aspect of the decision-making process. Let’s look at the differences—and similarities—of these two investment vehicles.
Money Market Funds
Money market funds are traditionally offered in retirement plan investment lineups because they pay modest interest and their share price (net asset value, or NAV) doesn’t fluctuate. Money market funds are restricted to lower-risk, shorter-duration, and highly liquid instruments, such as bonds issued by the government or high-grade corporations. Because the investments within money market funds can be sold quickly and easily, they provide a solid option for participants who seek a low-risk, short-term, and liquid holding.
Stable Value Funds
Like money market funds, stable value funds are viewed as safe investments. Stable value funds pay interest and offer a fixed NAV. In addition, stable value solutions offer more competitive yields, have limited volatility, and have historically outperformed money market funds.
Although stable value funds also offer daily liquidity to participants, there is a critical difference that makes them potentially less liquid than money market funds when they are offered in a retirement plan. Here’s why: If a retirement plan removes a stable value fund from its investment lineup and that fund’s market value is less than its contract (book) value, the fund may be subject to a market value adjustment. When this happens, it can cause participants to incur a loss. To mitigate that potential loss, a plan sponsor may elect to wait for a specified period (called a “put” period—usually 12–60 months, depending on the contract) until a market value adjustment is no longer required.
Given the similarities and differences discussed here, let’s compare the respective attributes of money market funds and stable value funds:
Money Market Funds | Stable Value Funds | |
Investments | Short-term, high-quality bonds issued by the government or corporations | Insurance or bank-backed guarantees and longer-term, high-quality bonds |
Investment Objectives | Preserve principal and income | Preserve principal and income |
Risk | Low risk | Low risk |
Liquidity | Highly liquid | Highly liquid, but with potential restrictions |
Investment Returns | Modest; typically retain NAV | Modest; typically higher than money market funds |
Cost | Typically expressed as an expense ratio; based on the expenses of the mutual fund | Typically based on a spread determined by the issuing insurance company |
Making the Right Choice for Your Retirement Plan
In fluctuating markets, 401(k) investors often turn to money market and stable value investments for stability. Although both options present retirement plan fiduciaries with principal preservation options for retirement plan investment menus, each possesses important structural differences. These variations generally allow stable value funds to provide higher income and returns (e.g., intermediate-term core bonds), while money market funds offer simpler, more liquid—but potentially more modest—returns.
For retirement plan fiduciaries, here’s an important reminder: determining which option to include in your plan’s investment menu is a fiduciary act, and factors—such as the costs and needs of your participants—should be weighed carefully. If you’re uncertain about choosing investment options for your company’s retirement plan, perhaps you should lean on the guidance of an expert who understands the nuances of analyzing and selecting investments and can shoulder some—or all—of your fiduciary investment duties, such as a retirement plan advisor, consultant, or third-party fiduciary.
