Reply #102: Aw, crap! So how "safe" is that stable value fund in your 401(k)? [View All]

[antigop]

http://online.wsj.com/article/SB123146951198967057.html

'Stable-value" investment funds have been one of the last havens in employee-retirement accounts. But one, advised by money manager Invesco Inc. for now-collapsed Lehman Brothers Holdings Inc., has run into trouble, and is causing worry throughout the retirement-investing world.

In concept, stable-value funds, which generally invest in bonds and other fixed-income instruments, are supposed to maintain principal at par and recently paid out around 4% annually on average. Bolstering that is a built-in safety feature: If the portfolio value falls, the funds have insurance-like contracts with insurers and banks that are supposed to fill the gap.

The $235 million Lehman vehicle, though, lost 1.7% in value in December because bond prices fell and the insurance backing, called a "wrap" in financial parlance, ended after Lehman's mid-September bankruptcy filing.

The reason is tied to the wrap agreements negotiated for at least two of the fund's seven insurance providers, Pacific Life Insurance Co. and J.P. Morgan Chase & Co. Since the full coverage was no longer effective, Invesco severed the arrangements with them.

The 1.7% loss was subtracted from Lehman investors' accounts, so fund investors ended up receiving about 2% in interest in 2008. The entire situation is causing a stir among stable-value investors, who fear that it may spread to their funds if more bankruptcies crop up. Of course, the shortfall doesn't come close to the 39% decline in the Standard & Poor's 500-stock index last year.

I've been worried about this for some time....