Fixed Income

Stable value funds and guaranteed investment contracts (GICs) are designed to preserve capital. That means they make investments that have a low risk of losing money.

Stable value funds guarantee the value of your principal, which is your initial investment, and promise a fixed rate of return. They may buy US Treasury and corporate bonds as well as interest-bearing contracts from banks and insurance companies. Or all of the fund’s assets may go into GICs. GICs are insurance company products that resemble individual bonds or CDs—the issuer has use of your money for the term of the contract, and pays a fixed rate of interest in return.

Pros and Cons

Stable value funds and GICs pay interest at a higher rate than money market mutual funds. That’s one reason some investors who want to diversify a 401(k) account that contains more volatile investments, such as stock mutual funds, may choose these funds.

However, the interest rate on a stable value fund or GIC is generally guaranteed for only a predetermined time, sometimes as brief as three months, and varies with changing market conditions. Further, if you want to shift money out of the account, you may have to pay a penalty—sometimes a substantial one. That’s not the case when you move money from a stock or bond fund into another investment.

The big downside of capital preservation alternatives is that they’re less likely to provide long-term protection against inflation. That can be a major problem. You don’t want to find yourself short of the income you need in retirement.