Stable Value Funds

Q: My 401(k) plan offers a "stable value fund" which yielded 4.27% last year. With interest rates rising, is this a better alternative than traditional bond funds for my bond allocation money?

A: A stable value fund can be thought of as a bond portfolio wrapped in an insurance contract. That contract ensures that if returns fall below a certain level, the insurer will boost them to a certain minimum. Likewise, if returns are higher than a certain level, the insurer pockets the excess. As a long term investment they usually aren't very attractive because the returns tend to be low. But in a rising rate environment, they seem like a good substitute for money you would normally allocate to bond funds. Just make sure there aren't any unusual rules about transfers out of the fund, as some have strict requirements.

• What is a stable value fund | SmartMoney
• Sweet returns from stable-value funds | Kiplinger.com

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