Stable Value vs. Money Market Funds

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When it comes to protecting savings within retirement plans, two common options are stable value funds and money market funds. While both prioritize safety, liquidity, and a stable net asset value (NAV), they differ in investment strategies and potential returns. Understanding these differences can help plan participants make informed decisions.

Money Market Funds: Short-Term Safety and Liquidity

Money market funds primarily invest in ultra-short-term debt securities, often issued by the U.S. government. These securities typically mature within 90 days, allowing the fund to react quickly to changes in short-term interest rates.

Because of their short-term focus, money market funds provide daily liquidity and carry minimal risk. They are well-suited for conservative investors who prioritize quick access to cash and safety over higher returns.

Stable Value Funds: Long-Term Growth Potential with Stability

Stable value funds, available exclusively within retirement plans, invest in intermediate-term bonds with maturities between one and five years. These funds are backed by insurance contracts that protect against market losses, ensuring that the NAV remains stable even during short-term market downturns.

Participants also benefit from daily access to their funds, just like with money market funds. However, the longer bond maturities in stable value funds often generate higher yields, particularly during stable economic periods.

Performance in Different Interest Rate Environments

While stable value funds generally outperform money market funds during periods of economic stability, the reverse can be true during times of rising interest rates. For example, in 2022, money market funds offered more competitive returns as short-term rates surged. However, stable value funds tend to provide stronger long-term growth, making them a better choice for retirement savers with a long-term horizon.

Plan Sponsors and Fund Restrictions

Due to regulatory restrictions, retirement plan sponsors cannot offer both stable value and money market funds within the same plan. Switching between the two options also presents challenges. As a result, plan sponsors must carefully consider which fund aligns best with participants’ needs and the current economic environment.

While high short-term interest rates may make money market funds attractive in the near term, stable value funds often deliver more consistent long-term performance for retirement savers.

Both stable value funds and money market funds offer security and liquidity, but they serve different purposes depending on market conditions and investment goals. Money market funds excel in high-rate environments, while stable value funds provide stronger growth over the long term.

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