As a result, many 401(k) plans are looking at shifting to money funds that buy only government debt, which aren’t required to have redemption fees or set up “gates” to block withdrawals.

“Plan sponsors do not want to be exposed to a situation where plan participants can’t get their money, regardless of how remote that possibility is,” said Philip Suess, a partner at investment consulting firm Mercer LLC in Chicago.

Some other plans are considering replacing money funds altogether with other low-risk alternatives, principally with “stable-value” funds, which are diversified portfolios of highly rated bonds.

.These low-risk accounts are paying yields comparable to those of diversified bond funds and substantially higher than those of money-market funds. Plus, when interest rates eventually rise from today's historically low levels, stable-value accounts should avoid the losses likely to hit bond funds and still deliver higher returns than money-market funds.

"When you're in a rising-rate environment, stable value is your best choice," compared with bond or money-market funds, says Phil Suess, a partner at the Mercer Investment Consulting Inc. unit of Marsh & McLennan MMC -0.05 % Cos. "Our advice to clients has been, if you move away from stable value, what are you going to do with the money? Money markets paying nothing or a low-duration bond fund that can lose money? And why would you choose the latter, if you think the next direction [for interest rates] is up?"

The moves to stable-value funds come amid at least three lawsuits filed by lawyer Jerry Schlichter in which plaintiffs allege that plan officials breached their fiduciary duty by using low-yielding money funds without considering stable-value funds. Defendants health insurer Anthem Inc. and human-resources-services company Insperity Inc. have filed to dismiss the claims against them; Chevron Corp. hasn’t filed a legal response and didn’t respond to a request for comment. Insperity has claimed in a court filing that it isn’t a fiduciary of the plan. Anthem declined to comment.

An index of stable-value funds compiled by researcher Hueler Cos. returned an average 3% a year over the 10 years through February.

Still, there are environments in which savers might be sorry to be in a stable-value fund rather than a money fund. .

When interest rates rise, the yield on stable-value funds generally lags behind that of money-market funds

A 401(k) Defense Against Rising Rates'Stable value' accounts are likely to fare better than bond funds when interest rates head up again



By
Dorianne Perrucci

April 5, 2013 9:46 a.m. ET
They're as boring as they sound. They're more complex than they seem. But stable-value accounts can be a smart option for the most conservative slice of a 401(k) portfolio, especially in the current interest-rate environment

When Rates RiseStable-value accounts are at their most valuable in a period of rising interest rates. Consider an analysis by Galliard Capital Management Inc., a unit of Wells Fargo WFC 0.26 % & Co. that is a large stable-value manager. The firm looked at two hypothetical scenarios: one in which interest rates rise one percentage point a year for three years straight, with rates creeping up steadily each month, and a second where rates jump two percentage points over three months and then remain steady for the remainder of the three years.

In the first scenario of a steady, extended climb in rates, the firm found that investors would likely see the value of investments in mutual funds that hold short-term or medium-term bonds decline over a three-year period, while holders of stable-value accounts would see their balances continue to grow steadily. Holders of money-market funds would also see their accounts grow, although not as much as stable-value accounts