With personal savings a more critical part of retirement security than in decades past, baby boomers have to make the money they have accumulated last a lifetime.
That is why many people in their 60s have chosen to stash money in an asset class called stable value funds, which invest in short- to intermediate-term bonds, whose investment returns are protected by contracts that stabilize fund returns and preserve principal over time.
Its an asset class that delivers on its promise, said Jim King, a managing director and client portfolio manager at Prudential Stable Value in Newark, NJ
What stable value does is provide diversification in defined contribution plans, he said. It has low volatility and can serve as an anchor to a portfolio. And it has returns equivalent to intermediate term bonds.
Stable value funds which are only found in workplace retirement plans such as 401(k), 403(b) and 457 plans offer about as much security as money market funds, but pay a higher yield. They are not offered to IRA investors.
Annualized monthly returns on stable value funds were 2.72 percent as of October 2014 compared with 0.08 percent for money market funds, according to the iMoneyNet MFR Money Funds Index.
The major pitfall of stable value funds versus money market accounts is there is often a required holding period for stable value funds preventing the owner from cashing it in for six months to a year without a penalty.
During the financial crisis of 2008, stable value funds were the only asset class that did not lose value when stocks were down more than 30 percent.
But things are much different now.
The Samp;P 500 returned 13.69 percent in 2014 and the Dow Jones industrial average gained 9.82 percent last year, according to Morningstar.
So does it still make sense to load substantial portions of a retirement portfolio in stable value funds?
Beaver-based financial adviser PJ DiNuzzo thinks so.
We would recommend a material portion of an investors bond allocation be invested in stable value funds due to the relatively high yield given the risk-reward trade-off, said Mr. DiNuzzo, president of DiNuzzo Index Advisors Inc.
If you have 60 percent of the portfolio in stocks and 40 percent in bonds, some of that 40 percent bond portion should be in a stable value fund due to the attractive risk-reward trade-off.
According to the Washington, DC-based Investment Company Institute, which studied data from 24 million 401(k) accounts in 2013, retirement investors in their 60s, had a higher percentage of money invested in stable value funds than they had in bond funds 11.7 percent versus 11.6 percent. The same investors had only 6.2 percent of their portfolios in money market funds.
We have an aging population of baby boomers who are risk averse. So, we are seeing a rediscovery of stable value funds, said Gina Mitchell, president of the Stable Value Investment Association in Washington, DC Stable value is a perfect way to absorb uncertainty. It can be a shock absorber. It can mute or absorb the volatility in the market right now.