Money Market vs. Stable Value vs. Guaranteed Investment Contracts – How do these investment options compare?

Recently, a wonderful client of mine and I were evaluating a change in 401k provider. We were evaluating the investment options and were discussing the differences between money market funds, stable value funds, and guaranteed accounts.

Why is it so important to evaluate the money market fund (MMF), the stable value fund (SVF), and the guaranteed account or guaranteed investment contract (GIC)?

I started off explaining the purpose of the discussion was that we need to look at it through the lens of what is best for the employee. That is what the Department of Labor requires of us.

“Erick, shouldn’t we just choose the ones with the lowest fee?”

Trivia time: How many times is “lowest fee” mentioned in ERISA legislation?

Two things to keep in mind:

1. Nowhere does ERISA or the DOL require us to select the lowest cost fund.
2. Wearing our fiduciary hat, we must look at it as what’s best for the employee

Let’s define those investment options clearly so we can do our evaluation:

All 3 options are offered as a safe investment option for employees but differ in what they invest in and therefore the projected returns.

• Money Market Funds (MMFs) – invest in high-quality, short-term debt securities, such as U.S. Treasuries, Commercial paper, Certificates of deposit (CDs, Municipal securities, Repurchase agreements, Bankers’ acceptances.
• Stable value funds (SVFs) – conservative investment options that participate in both gains and losses. They are not guaranteed or insured by the U.S. government, and it’s possible to lose money in them. Stable value managers seek to get the investor a higher return by investing in guaranteed accounts and money market funds.
• Guaranteed insurance accounts – offer a guaranteed rate of return to the investor with downside risk protection. They are usually managed and guaranteed by a single insurance company.

What’s best for the employee?

In this case, the guaranteed account offered the investor 6% far outweighing the stable value or the money market options. The client was obviously pleased.

Not only will the investor get a higher (and guaranteed) rate of return but it will provide security and volatility protection to their portfolio.

That will probably keep them investing longer and contributing more to their 401k…

And that should result in them having more money at retirement…

And that should give them confidence and allow them to be a more productive at work…

And all of this should result in providing them with more monthly income at retirement….

And THAT is the purpose of offering a 401k.

We want to help employees have more money at retirement. It’s not supposed to be about lowest fees or offering the hottest investment options of the day. It’s to help them have income to pursue a long and healthy retirement.

What’s in your 401k? (I couldn’t resist!)