Current Thinking

Not All Stable Value Funds Are Created Equal

In turbulent markets, stable value investments can be an attractive choice for retirement plan participants worried about the fluctuations in the marketplace. Like any investment option, stable value funds have advantages and disadvantages. Consequently, there are circumstances where stable value funds may be a great fit and there are situations where they may not be the best solution for plan participants.

While most defined contribution plans include a stable value fund option, often the best choice depends on certain facts and circumstances. Considering a stable value product for a plan’s investment line-up brings on fiduciary liability for plan officials. As with all plan investment options, plan officials are responsible for the prudent selection and monitoring of a stable value fund. Understanding the unique aspects of stable value funds is the first step in an effective evaluation and assessment process that, when documented, can help mitigate fiduciary liability under the Employee Retirement Income Security Act (ERISA) of 1974.

Importantly, the focus here is not whether a stable value fund is appropriate for a certain plan participant. Rather, it is to offer general guidance to plan investment committees and other plan officials on how to select and monitor a stable value fund. There are different types of stable funds and the nature of their underlying investments can differ, as can the associated fees, guarantees and restrictions. Once these elements are understood, only then can a plan sponsor and his or her advisors make prudent decisions regarding stable value selection and retention.

Not all stable value funds are created equally. Let’s explore some of the key differences.

Types of Stable Value Funds

Different organizations offer diverse types of stable value-type products. Many of the differences between products are attributable to the different laws that govern the offering organizations. For example, stable value providers include insurance companies, banks and trust organizations. Each of these entities are governed by different rules and regulations, hence the variation in stable value products and approaches. At least one commonality among stable value products is the fact that they are only as secure as the organization or organizations backing them up.

Insurance company stable value products, commonly called guaranteed investment contracts or GICs, are backed by the strength of the insurance carrier. If the carrier became insolvent, potentially no assets would be available to pay participants.

Bank or trust company stable value products, commonly structured as collective investment trusts or CITs, are often referred to as synthetic GICs. That is because one or more outside entities are contracted to insure all or a portion of the stable value product for a fee. This is commonly called a “wrap fee.”

What are the underlying investments of a stable value product?

[1] Plan Sponsor Council of America, 64th Annual Survey, 2021

It depends. For example, insurance carriers, generally, do not have an earmarked portfolio of assets backing their stable value products. Instead, the stable value product is, in effect, invested in the insurance company itself. Sometimes this is referred to as the general account. Other stable value products, such as those issued by banks or trust companies have a specific underlying bond portfolio associated with the stable value fund. 

Are there restrictions on distributions from stable value products?

There often can be. Again, doing homework is critical when it comes to understanding possible limitations on when distributions can occur. Many stable value products have distribution limitations, commonly known as a “put” option. A put option can limit the amount of a distribution, the timing of a distribution (e.g., requiring a 12 month wait), or even imposing a market value adjustment (explained next).

Market value adjustments are not well understood, yet these adjustments are an important factor to consider when selecting a stable value product as a plan investment option. Essentially, a market value adjustment is a reduction in the amount available to be distributed in certain circumstances. A market value adjustment may occur if the present value of the underlying investment pool is less than the book or face value of the investments. The following example may help illustrate market value adjustments.

Consider this example: Stable Value product “SV” has a $10,000,000 bond portfolio. From an accounting perspective X is valued at $10,000,000 because this was the original purchase price of the bonds. The purchase price is referred to as the “book value.” However, the bonds may not be worth $10,000,000 today. Perhaps their current market value is $12,000,000 or maybe $8,000,000. The actual value of the bonds today is the “market value.”

Let’s assume the market value of the portfolio is $8,000,000 and the terms of SV impose a market value adjustment if an immediate distribution is requested. Often the market value adjustment will not apply if the distribution is postponed for a specified period, commonly 12 months. The rationale is if the participant wants his or her money immediately, the provider must sell bonds at a loss and this loss is passed on to the participant. Conversely, if the participant waited 12 months, likely, some bonds would mature during that time at face (or book) value, and the cash could then be used to pay participants without incurring a loss.

Put options and their limitations can be complex and require close analysis by plan investment committees and other plan officials before decisions are made regarding the stable value product selections. Some products allow immediate distributions for participants who have separated from service, others do not. Other products impose a market value adjustment only if the book-to-market value ratio is below a certain percentage.

Do stable value products offer a guaranteed rate of return?

Some stable value products, specifically those offered by insurance carriers, offer a guaranteed rate of return. Non-insurance carrier products, typically, do not have a guaranteed rate of return.

What are the fees associated with stable value products?

As with other features, fees can vary by the product. Some products do not charge a fee, rather, the net amount paid under the contract is reduced by a certain number of basis points, thus reducing the yield.

In summary, stable value products are not created equally. Before committing to an option, plan officials are encouraged to explore the significant differences in how the funds are structured, backed and credited, and the possible limitations on distributions. All of these factors impact which stable value product would be in the best interests of plan participants.

Note: This material is provided solely for informational purposes, does not constitute investment, tax, legal, or accounting advice, and is not a recommendation or an offer or solicitation to buy or sell any securities, including stable value funds. Past performance is not a guarantee of future results.

About the Author

Richard Rausser

Richard W. Rausser has more than 30 years of experience in the retirement benefits industry. He is Senior Vice President of Thought Leadership at Pentegra, a leading provider of retirement plan and fiduciary outsourcing to organizations nationwide. Rich is responsible for helping to shape and define Pentegra’s viewpoint on workplace retirement plans, plan design strategy, retirement success and employee savings trends. His work is used by employers, employees, advisors, policymakers and the media to produce successful outcomes for American workers.  In addition, Rich is responsible for Pentegra’s Defined Benefit line of business, which includes a team of Actuaries and other retirement plan professionals as well as Pentegra’s BOLI line of business.  He is a frequent speaker on retirement benefit topics; a Certified Pension Consultant (CPC); a Qualified Pension Administrator (QPA); a Qualified 401(k) Administrator (QKA); and a member of the American Society of Pension Professionals and Actuaries (ASPPA). He holds an M.B.A. in Finance from Fairleigh Dickinson University and a B.A. in Economics and Business Administration from Ursinus College.