A 401k plan will offer employees participating in the plan a range of investment options. The typical 401k plan will offer several stock and bond mutual funds, plus the option of a stable value fund. A 401k participant should allocate her contributions into different funds based on her investment goals and market outlook.
Mutual Fund Volatility
Stock mutual funds provide 401k participants with exposure to the long-term growth potential of professionally managed stock portfolios. Bond funds hold government or corporate bonds to earn market rates of interest from those bonds. Both the stock and bond markets have periods of time when the values decline significantly. Fund investors do not mind when the values are going up but no 401k participant likes to see the value of his investment account decline along with a down market in stocks or bonds.
Stable Value Fund
The stable value fund option is a fund that holds short-term debt securities. The fund is designed to not fluctuate in share price. The theory behind a stable value fund is to earn a higher rate of interest than a money market fund and have no fluctuation of the share value. The fund manager purchases insurance coverage that aims to protect investor values and maintains the fund value, if for some reason the securities held by the fund decline in price.
Growth vs. Stability
Deciding whether to invest in mutual funds or a stable value fund is to choose between long-term growth with a possibility of losses vs. no chance of losing money while earning a fixed rate of interest. For someone saving for a retirement many years in the future, a long-term growth focus should provide a larger account balance when retirement approaches. The current rate of interest paid by the stable value fund should also be taken into consideration. If the fund is paying a low rate of interest, an employee will not benefit from tax deferred income or growth inside of her 401k account.
An employee could use a combination of mutual funds and the stable value fund to set up an asset allocation across stocks, bonds and a guaranteed value account. Asset allocation will even out the ups and downs of the overall account value. The employee's 401k contributions could be allocated between different funds, building an allocation plan as the account value increases. Most 401k plan administrators allow participants to set up automatic rebalancing once a quarter or once a year. If automatic rebalancing is not available, the plan participant could manually rebalance the funds to maintain the desired percentage allocation to each fund chosen.