Stable Value Funds Receive Increased Scrutiny

Just as the underlying investments in supposedly “safe” money markets are receiving increased scrutiny, so too are the underlying investments in stable value funds.

JPMorgan Chase & Co. is “shedding mortgage debt from a stable value fund, under pressure from insurers in a case raising questions about suitable investments for funds normally regarded as a super-safe haven for retirement savings," Reuters reports

Stable value funds, as the news service notes, are used in 80% of 401(k) self-directed retirement plans and are meant to be the most conservative choice for employees—liquid, plain vanilla and backed by insurance.

But the $1.7 billion JPMorgan Stable Asset Income Fund has invested as much as 13% in private mortgage debt underwritten and rated by the bank itself, according to documents reviewed by Reuters, leading to a potentially troubling conflict of interest. The portfolio is available through a collective trust, which pools assets among various 401(k) plans, as well as through separately managed accounts whose allocations closely mimic the portfolio.

JPMorgan cut that mortgage exposure to about 4% on Tuesday, but the industry average for all private placements in stable value funds is only about .5%, Reuters notes, citing Hueler Analytics.

The “stable value” largely comes from the purchase of insurance which, unlike money market funds, contains certain restrictions related to liquidity and redemptions. According to the Stable Value Investment Association, stable value funds are structured in two ways: as a separately managed account, which is a stable value fund managed for one specific 401(k) plan; or as a commingled fund, which pools assets from many 401(k) plans. Commingled funds offer the benefits of diversification and economies of scale for smaller plans.

“Regardless of how stable value funds are structured, they are comprised of a diversified portfolio of fixed income securities that are insulated from interest rate movements by contracts from banks and insurance companies,” according to the association’s website. “The protection from interest rate volatility is universal to stable value funds. How this contract protection is delivered depends on the type of stable value fund investment purchased.”