Stable value funds OK in bear market, but are they safe?

— -- Before you open your quarterly 401(k) plan statement, plan ahead. Take a few deep breaths. Put away knives and other sharp objects. Turn up the radio so your children won't hear your cries of anguish.

Once you've stopped sobbing uncontrollably, you'll probably notice that few of your investments have been spared by the bear market. Large-company stock funds, small-company funds, international funds, even bond funds. Down, down, down.

But amid the gloom, you may detect a ray of sunshine: your plan's stable value fund. These funds, which are offered by most large 401(k) plans, were up an average of 5.2% through September, according to the Stable Value Investment Association.

Like bond funds, stable value funds typically invest in corporate and government bonds. In addition, though, they buy contracts from banks and insurance companies, known as wrappers, that guarantee the principal and accumulated interest even if the underlying investments decline in value.

Stable value funds invest in high-quality bonds with an average maturity of 2.8 years, says Gina Mitchell, president of the Stable Value Investment Association. This enables them to deliver better returns than money market funds, which typically invest in fixed-income securities that mature in 30 to 90 days, she says.

Concerned investors

Unable to stomach the stock market's violent behavior, investors have flocked to fixed-income investments, including stable value funds.

In September, 401(k) plan investors moved $921 million out of equities into fixed-income investments, and nearly 70% of that amount went into stable value funds, according to the Hewitt 401(k) Index, a barometer of investment activity in large 401(k) plans.

But after the government bailout of insurance giant AIG — and reports that other insurers are having financial problems — some investors are concerned about the stability of stable value funds. While losses in stable value funds are rare, the funds aren't guaranteed by the federal government.