During periods of market turbulence and low interest rates, many investors struggle to find investment alternatives that aren’t getting hammered. But those saving for retirement may be pleasantly surprised to discover a unique breed of mutual fund known as stable value funds. These funds are somewhat similar to money market accounts. except that they post much higher yields with relatively little risk. We’ll explore stable value funds and their advantages and disadvantages, as well as for whom these funds are appropriate.

What Is a Stable Value Fund?

Stable value funds used to invest almost exclusively in Guaranteed Investment Contracts (GICs), which are agreements between insurance carriers and 401(k) plan providers that promise a certain rate of return. However, a number of insurance carriers that invested heavily in junk bonds in the ’80s suffered heavy losses and defaulted on some of their agreements. Retirement plan participants of other providers, such as Lehman Brothers, which declared bankruptcy, discovered that their GICs became invalid in the event of corporate insolvency. Therefore GICs fell largely out of favor as funding vehicles for stable value funds.

These funds now invest primarily in government and corporate bonds with short- to medium-term maturities, ranging from approximately two to four years. Stable value funds are therefore able to pay higher interest than money market funds, which usually invest in instruments with maturities of 90 days or less. Of course, this means that the holdings within stable value funds are also more susceptible to changes in interest rates than money market holdings. This risk is mitigated by the purchase of insurance guarantees by the fund that offset any loss of principal, which are available from around a dozen different banks and insurance carriers. Most stable value funds will purchase these contracts from three to five carriers to reduce their default risk. Usually these carriers will agree to cover any contracts defaulted upon in the event that one of the carriers becomes insolvent. There has also been a recent shift towards more conservative portfolio offerings as a result of the market meltdown in 2008. (For more, see The Money Market: A Look Back .)

Perhaps the biggest limitation of stable value funds is their limited availability. These funds have traditionally only been available to 401(k) plan participants of employers who offered these funds within their plans. However, stable value funds have recently become available to IRA participants as well, thus making them available to anyone who opens a traditional or Roth IRA. Another key point to remember is that these funds are stable in nature, but not guaranteed. Although the chances of losing money in one of the funds is relatively slim, they should not be categorized with CDs. fixed annuities or other instruments that come with an absolute guarantee of principal. (To learn more, see our Traditional IRA Tutorial .)