Money Market Vs. Stable Value: How They Differ (and How They Don’t)

In a retirement plan investment menu, money market and stable value funds can provide retirement plan participants with conservative investment options designed to preserve an account’s principal and income. There are nuances, however, in how they achieve that objective. For retirement plan fiduciaries, understanding the differences between money market funds and stable value funds is a foundational aspect of the decision-making process. Let’s look at the differences—and similarities—of these two investment vehicles.

Money Market Funds
Money market funds are traditionally offered in retirement plan investment lineups because they pay modest interest and their share price (net asset value, or NAV) doesn’t fluctuate. Money market funds are restricted to lower-risk, shorter-duration, and highly liquid instruments, such as bonds issued by the government or high-grade corporations. Because the investments within money market funds can be sold quickly and easily, they provide a solid option for participants who seek a low-risk, short-term, and liquid holding.

Stable Value Funds
Like money market funds, stable value funds are viewed as safe investments. Stable value funds pay interest and offer a fixed NAV. In addition, stable value solutions offer more competitive yields, have limited volatility, and have historically outperformed money market funds.

Although stable value funds also offer daily liquidity to participants, there is a critical difference that makes them potentially less liquid than money market funds when they are offered in a retirement plan. Here’s why: If a retirement plan removes a stable value fund from its investment lineup and that fund’s market value is less than its contract (book) value, the fund may be subject to a market value adjustment. When this happens, it can cause participants to incur a loss. To mitigate that potential loss, a plan sponsor may elect to wait for a specified period (called a “put” period—usually 12–60 months, depending on the contract) until a market value adjustment is no longer required. 

Given the similarities and differences discussed here, let’s compare the respective attributes of money market funds and stable value funds:

 

Money Market Funds

Stable Value Funds​

Investments

Short-term, high-quality bonds issued by the government or corporations

Insurance or bank-backed guarantees and longer-term, high-quality bonds

Investment Objectives​

Preserve principal and income

Preserve principal and income

Risk​

Low risk

Low risk

Liquidity​

Highly liquid

Highly liquid, but with potential restrictions

Investment Returns​

Modest; typically retain NAV

Modest; typically higher than money market funds

Cost​

Typically expressed as an expense ratio; based on the expenses of the mutual fund

Typically based on a spread determined by the issuing insurance company