I read that a stable-value fund that Invesco manages for Lehman Brothers' 401(k) plan lost money. How safe are other stable-value funds?
It’s true that an Invesco fund is the first stable-value fund ever to lose money. But the fund's 1.7% decline in December 2008 is peculiar to the situation at the now-bankrupt Lehman, and it probably doesn't portend wider troubles in stable-value funds, which hold more than $400 billion, almost entirely in retirement accounts.
Stable-value funds generally invest in high-quality bonds with maturities of two or three years. That is a conservative strategy. In addition, the funds buy insurance "wrappers" that guarantee the principal. But two developments after Lehman's abrupt bankruptcy in September undermined the stable-value fund in the company's retirement plan.
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First, many former employees withdrew money from their 401(k)s, forcing the fund to sell bonds at a loss. In addition, contracts with three of the Lehman fund's seven insurers specified that their wrappers would become invalid in the event of bankruptcy.
Generally, stable-value funds negotiate new contracts in the event of a bankruptcy and maintain insurance coverage, but Lehman didn't have time to renegotiate the contracts. "It is difficult to imagine a worse case than what happened with Lehman," says David Babbel, professor emeritus at the University of Pennsylvania’s Wharton School and author of a study on stable-value performance.
The average stable-value fund returned about 4% in 2008. After the 1.7% hit in December, the Lehman fund gained 2.2% for all of 2008. An Invesco spokesman says that all of the fund's assets are now insured against loss and that the December write-down is likely to be a one-time event.
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