Stable value funds are soap box racers that now face constraints that will limit their top speed. Our money market funds will soon have the performance attributes of a pinewood derby car dressed up as a turtle, with a smallish piano on its back. I haven’t read the official pinewood derby rule book as of yet, but this does not sound like a winning configuration.
The crux of the unhappiness of the wrap providers is, in their view, forcing a plan to wait a year to withdraw its funds intact from Stable Value Fund ABC isn’t equitable with the interest rate risk being taken by the fund (a 12-month put doesn’t match the potential of a 3% loss of principal).
When the potential upside of a stable value fund – versus a money market fund — was 1.5%, it was easier to justify the complexity of the investment.
The takeaway for investors is that the paranoia on the part of the stable value managers has resulted in real life limitations. Many employers will offer only a stable value or money market option – not both. If there is no competing option, then there is no need for an equity wash.
Stable value funds have thus far lived up to their name during the cataclysmic year that has been 2008. This is, without a doubt, a good thing.
Stable value and money market funds have more differences than similarities. These differences do not necessarily make one better than the other but it is fair to say that the average stable value fund should credit a higher rate of interest than the average money market fund over the long haul.