Stable value accounts are a good choice for the most conservative element of a 401(k) portfolio, especially in the current interest-rate environment. And they're performing well right now — at the end of March, the Wall Street Journal notes, the average stable value yield was 2%. By comparison, the average taxable money fund is yielding 0.02%, and diversified portfolios of short-term and intermediate-term bonds are yielding around 0.6% and 1.8% respectively.
But the stable value approach should do even better if interest rates rise. To explore this common assumption, Galliard Capital Management Inc., a unit of Wells Fargo, examined two hypothetical scenarios:
• interest rates rise one percentage point a year for three years straight, with rates creeping up steadily each month; and
• rates jump two percentage points over three months and then remain steady for the remainder of the three years.
In the first scenario — a steady, extended climb in rates — Galliard found that investors would likely see the value of investments in mutual funds that hold short-term or medium-term bonds decline over a three-year period, while holders of stable-value accounts would see their balances continue to grow steadily. Holders of money market funds would also see their accounts grow, although not as much as stable value accounts.
In the second scenario — a sudden jump in interest rates — short-term and medium-term bond funds take an immediate hit in their value and then take about two years or more to climb back to their starting value. With both stable value accounts and money market funds, investors never see the value of their accounts go down in this scenario, and stable value accounts do slightly better than money market funds over the three-year period.
