AS YOU REVIEW

the investment options of your company's retirement plan, you very well might come across something called a stable-value fund. In fact, until recently, the

time you would ever encounter this type of investment was through your employer's program, since these funds weren't marketed directly the public. Now, however, stable-value funds are available for

accounts as well.

And that's a good thing, since for very conservative investors (i.e., those nearing or in retirement), a stable-value fund can be an appealing investment. These funds generally offer returns that are a few percentage points higher than your average money-market fund, with just marginally more risk. As of June 30, 2003, these funds had doled out returns of 5.6% over the past 12 months. Given that equity funds in mid-2003 lost 0.4% over that time period and that money-market funds delivered an average one-year gain of just 0.87%, those returns look pretty darn good.

So what's in a stable-value fund, anyway? Until recently, most of them relied heavily on guaranteed investment contracts, or GICs. These are contracts between insurance firms and a company's retirement plan guaranteeing investors a fixed rate of return. But after several insurers financed by junk bonds in the 1980s sold GICs to retirement plans and then went under, GICs became less welcome in the stable-value world.

Now the majority of stable-value assets are invested in "synthetic GICs," also known as "wrapped bonds". These are high-quality, short- to intermediate-term bonds that are bound by insurance "wrappers." The way it works is if a stable-value portfolio falls below the rate of return set by the wrapper, the insurer pays the difference, keeping the fund stable. On the other hand, if the portfolio gains beyond the wrapper's set return, the fund pays the insurer the difference. Wrapped bonds currently comprise about 60% of the assets of the average stable-value fund.

Assuming you invest in a fund (rather than an individual GIC something you might still find in some small-company retirement plans), the risk of a stable-value fund is minimal. For younger investors, though, these funds come with a different type of risk. Sure, they're safe, but if retirement is still a long way off, you need to invest in something with a heftier return. Otherwise, you run the risk of underperformance. But if you've reached the age at which you'd like a nice dollop of fixed income in your portfolio, a stable-value fund could fit the bill nicely.

As we mentioned above, you can now hold these funds in an IRA as well as a 401(k). In the past few years, eight stable-value mutual funds, such as Gartmore Morley Capital Accumulation IRA and Scudder PreservationPlus Income, have come on the scene, allowing investors to hold these funds outside of an employer plan.

If you are tempted by a stable-value fund, keep a particularly close eye on fees, as you should with any fixed-income vehicle. Within defined contribution plans (i.e., 401(k)s), such fees average less than 0.5%, but in an IRA, the fees are likely to be as high as 1.0%, according to the Stable Value Investment Association. Also, many plans have stringent redemption requirements surrounding their stable-value investments. For example, some plans will force you to move your withdrawal amount into an equity fund, instead of another fixed-income investment. (This is to prevent investors from shifting their stable-value assets into the bond market whenever it looks more promising.) Also, some IRA-based funds may impose redemption fees. So just make sure you know all the rules into before you invest.