stable value funds in 40l(k) plans
In Oct you replied to my same question that stable value funds in 401k plans are chicken money funds and they are insurance company contracts. That's literally true.... but they are wrap contracts and they are backed by portfolios that last time in 2006-2009 were full of junk. I understand that mortgages from the agencies now have tiny down payments so we are back to junk. If Obama and the Fed had not bailed out the big one last time there would have been loses to many, many 401 holders. So my question is still has anything changed in the way the credit rating agencies, swap issuers, portfolio purchasers or fund managers operate that make these funds a less risky investment than they were when the market blew up last time? Thank you.
Terry Says
Ha! The issue with the stable value funds in 401(k) plans -- funds which contain insurance company contracts promising a fixed rate of interest -- is whether the insurance companies can "make good" on the promises in these contracts. Yes, the insurers invested in mortgages and other securities to "back" these contracts. And I am hoping --as are federal regulators -- that they learned their lesson! Many new regulations have been put into place regarding capital, risk, and cleared derivatives to guard against another event like the crisis of the 2008-09 crisis. We can never say never. But I think the risks are significantly lower now.
