Stable Value Course

Learning Outcomes

Executive Summary: This section is designed to provide learners with an understanding of the regulatory framework governing stable value funds. Learners will gain insights into the various stable value product types and detail the specific needs and preferences of key stable value demographics. Additionally, learners will understand the different roles that plan sponsors, stable value providers, trustees, and custodians play within the stable value industry.

Learners will:

1. Understand the participant demographics for stable value funds, including pre-retirees, retirees, conservative investors, and institutional entities, and how their investment needs align with the benefits of stable value funds.
2. Learn the roles and responsibilities of key industry partners, including plan sponsors, stable value providers, and trustees and custodians within the stable value fund ecosystem.
3. Recognize the various regulatory bodies and regulations, including ERISA, FASB, SEC, OCC, IRS, GASB, and DOL, that govern stable value funds and understand the role these regulations play in protecting investors.
4. Explore the three primary types of stable value products—traditional GICs, separate account contracts, and synthetic GICs—and explain the unique features and protections each type offers.
5. Compare stable value funds to annuities, highlighting their respective purposes, structures, benefits, and appropriate contexts for investment within retirement planning.

Stable Value Fundamentals

Stable value funds are conservative investment options offered to participants in defined contribution plans such as a 401(k) or a 529 college savings plan. Stable value funds are attractive because the principal is protected. An insurance company or bank is contractually obligated to protect investors from any loss of capital or interest making the fund an extremely low-risk investment similar to a money market fund. Historically, stable value funds provide a higher rate of return than money market funds.

Stable value funds invest in high quality, short-to-intermediate duration fixed-income investments and insure the principal value of the funds with investment contracts with insurance companies and banks. These contracts are called wrap contracts or wrap agreements.

Benefits of Stable Value

Attractive Long-Term Returns: Investors choose stable value products for their reliable long-term returns, making them a safer option for the part of their savings they prefer not to risk significantly. Stable value funds can offer returns similar to short- or intermediate-term bond funds, but with lower volatility. This blend of low risk and appealing returns compared to other conservative investments has shown strong relative performance over time.

Lower Risk: While no investment is completely without risk, stable value is one of the safest choices for conservative investors in defined contribution plans. It involves investing in a well-rated, diversified portfolio of fixed-income assets, and it benefits from contracts issued by insurance companies and banks designed to protect the principal and reduce exposure to market volatility.

Diversification: Stable value serves as an effective diversification tool. Its returns are not closely correlated with stock market performance, making it a good complement to riskier investments in retirement plans. Additionally, stable value offers daily principal protection that bond funds do not provide. Including stable value in a portfolio allows investors to model a higher overall return with the same level of risk than they could without it, by investing a higher percentage in stocks and the remainder in stable value rather than more volatile bond funds.

Attractive for Retirement Income: Stable value is particularly appealing for those approaching or in retirement, as it helps transition from saving to generating income. With its combination of low risk and return potential, it protects against sequence-of-returns risk—the risk of needing to sell assets at a loss early in retirement, which can significantly shorten the potential lifespan of a retirement portfolio. Stable value also typically offers daily liquidity, allowing investors to access their savings for unexpected expenses.

Time Tested: Stable value has been available since 1974, coinciding with the launch of defined contribution plans, and has proven itself through various market cycles. Like many investments, stable value has evolved over the years to meet the changing needs of plan sponsors and participants. It has remained a trusted option for capital preservation, widely used by investors of all ages in 401(k), 457, 403(b), and 529 plans, and represented about 8% of the $10 trillion in defined contribution plan assets as of December 31, 2024.

Summary: The main benefits of stable value funds can be summarized as providing a low-risk investment option which preserves an investor's capital while providing higher returns than a traditional savings account or money market fund.

Drawbacks of Stable Value

The main drawback of stable value funds is that they provide lower returns than many other investment types which invest in more risky assets.

Also, stable value products rely on benefit-responsive contracts from financial institutions. This means that participants can withdraw their original deposit plus any accrued interest (referred to as book value) for standard transactions on a daily basis. However, when a plan sponsor wants to cash out a stable value product, their ability to withdraw at book value may be limited. As mentioned in an earlier section, ending a stable value product can involve specific exit provisions that are detailed in the product's contracts.

These exit provisions outline the necessary notice period, timeline, and conditions that must be met for the plan sponsor's withdrawal or termination of the stable value product to be processed at book value. Typically, these provisions become more restrictive when the market value of the fixed-income securities backing the contracts falls below the book value guaranteed by the issuer. That being said, the plan sponsor may terminate the contract at market value at any time, with proper notice.

History of Stable Value

Stable value contracts originated in the 1970s at the same time US defined contribution plans began. These contracts were intended as a conservative investment option for retirement plans. Originally, fund holdings were predominantly GICs (guaranteed investment contracts). GICs are usually issued and backed by the general account of large insurance companies. The GICs were limited in that investors had little flexibility over the control of the assets (i.e., securities backing the contracts). In addition, rights to the assets that were backing the contract were equally shared with the general account's beneficiary claims.

Separate account GICs partially addressed these concerns by segregating the assets from the insurance company's general account. The assets could only be used to back the value of the stable value fund and could not be used to settle any claims from the insurance company's policyholders. In 1988, synthetic GICs emerged to manage a stable value fund using an insurance contract (wrap contract) to guarantee the book value of the portfolio, control the investment strategy, and separate the beneficiary claims of the insurance company from the stable value product.

Investors

Historically, stable value investors have been those with a conservative risk tolerance, often nearing or in retirement. Stable value investors are mostly older plan participants, with those aged 60 and above holding about half of all stable value assets, and those 50 and older owning around 85%. This highlights the significance of stable value for participants nearing or in retirement. The principal preservation objective, steady returns, and attractive risk/return profile of stable value products make them well-suited for plan participants looking to protect their retirement savings and generate income during retirement.

However, stable value can also benefit younger investors. As customized asset allocation solutions in retirement and defined contribution plans become more popular, younger investors are also recognizing the benefits of stable value and its important role in their retirement portfolios and 529 education savings plans.

With increased education for advisers and plan participants, more retirees are expected to retain at least some of their assets in their defined contribution plans after retirement. It's important for investors at this stage to understand that stable value products are only available within qualified retirement plans and cannot be accessed through IRAs. Therefore, if a plan participant decides to roll over their assets into an IRA, they will lose access to stable value investments.

Stable value is an effective "all-weather" solution, having proven resilient through various challenging market cycles over the past 50 years. Its consistent, low volatility returns make stable value an excellent source of retirement income and a reliable option for downside protection, particularly during times of market volatility.

Individual Retirement Plan Participants: Individuals who participate in employer-sponsored retirement plans, such as 401(k) plans, may choose to allocate a portion of their retirement savings to stable value funds. These participants typically seek capital preservation, steady returns, and a conservative investment option within their retirement portfolio.

Pre-Retirees and Retirees: Individuals nearing retirement or already retired often choose stable value funds to preserve their wealth and generate a reliable income stream. The stability and fixed returns offered by these funds can help retirees maintain their desired lifestyle and manage longevity risk.

Conservative Investors: Conservative investors who prioritize capital preservation and steady returns may opt for stable value funds. These individuals are typically risk-averse and seek investment options with minimal volatility and relatively low risk.

Plan Sponsors: Employers or plan sponsors who offer retirement plans to their employees may include stable value funds as an investment option. Plan sponsors may select stable value funds to provide their employees with a conservative investment option that balances risk and return.

Institutions and Trusts: Institutional investors, such as pension funds, endowments, foundations, or trusts, may invest in stable value funds.

Industry Participants and Roles

Plan Sponsors: Plan sponsors, typically employers, are responsible in their fiduciary role for choosing appropriate investment options for their plan participants and may offer stable value funds as investment options within their retirement plans. They select the stable value funds that will be available to their employees and make decisions regarding the plan's investment lineup.

Stable Value Providers: Stable value providers are financial institutions, such as banks or insurance companies, that offer stable value contracts or wrap contracts to enhance the stability of the underlying investments. These providers assume the interest rate risk of the stable value fund and protect the principal value against losses. They may also provide additional services like liquidity management and participant servicing.

Stable Value Investment Managers: Stable value investment managers purchase the stable value contracts from stable value providers and direct the investment management of the fixed-income securities supporting the stable value contracts. They manage the stable value fund liquidity to allow participants to invest or withdraw assets on a daily basis, and they report the activity and performance of the stable value fund to the plan sponsor.

Trustees and Custodians: Trustees and custodians are responsible for safekeeping and administering the assets of the stable value fund. They may be banks or trust companies that hold the investments, process transactions, and ensure compliance with regulatory requirements.

Contract Types

There are three primary types of stable value funds: traditional guaranteed investment contracts (traditional GICs), separate account contracts, and synthetic guaranteed investment contracts (synthetic GICs), also known as book value wrap contracts (wrap contracts).

Traditional GICs are contracts issued by an insurance company that provide a fixed rate of return and are backed by the assets in their general accounts. The contract guarantees the fixed rate of return regardless of the performance of the general account assets. Claims related to general account contracts are equally entitled to the general account investments as the insurance company's policy holders and ahead of general creditors.

Separate account contracts are contracts issued by an insurance company that guarantee a rate of return backed by the assets held in an insurance company separate account. The return may be fixed, indexed, or reset based on the performance of the underlying assets. The separate account assets are set aside from the insurance company's other investments for the exclusive benefit of the participating plan and cannot be used for other purposes. Additional protection is often included with access to the insurance company's general account assets to further guarantee the contract.

Synthetic GICs and wrap agreements are contracts issued by a bank or insurance company that guarantee a rate of return and provide book value accounting benefits. The guarantee is backed by a portfolio of assets held in an external trust. The rate of return is reset periodically based on portfolio performance. The participating plans own the assets.

Stable Value vs Annuities

Stable value funds and individual annuities are both designed to provide steady returns on investments, but they are different investment products. Individual annuities typically offer higher returns than stable value funds, but because of more complicated investment structures, they have higher fees. Annuities are designed to provide income in retirement while stable value funds are designed to preserve capital and provide steady returns. The main distinction between a stable value fund and a fixed rate annuity lies in their ownership, purpose, and structure, with stable value funds being primarily investment options within retirement plans, and fixed rate annuities are individual insurance contracts used for retirement income planning.

	Money Market	Individual Annuities	Short-Term Bond	Stable Value
Offers Principal Preservation	Yes	Yes	No	Yes
Price Volatility	Rare downside volatility – Government Money Market funds still offer a $1.00 NAV. Most funds provide a subsidized 0.0% yield floor when needed.	Low	Low	Rare downside volatility – Investment contracts that wrap the underlying bond portfolios provide a 0.0% crediting rate floor.
Where Most Favorable	Rapidly rising rates	After rising rates	Slowly rising rates and steeper yield curve	Most portions of the business cycle
Real World Scenario and Impacts to Comparable Products (Covid – March, 2020)	The Fed lowered the Fed Fund rate by 1.50% to help provide liquidity. Yields on money market funds quickly dropped to the 0.0%-0.25% range.	The life insurance industry saw increased risk, but annuity investors were not harmed.	Forced selling to fund massive outflows and meet margin calls caused significant liquidity issues in high-quality, short-term fixed-income assets. It took Congress, the Fed, and the US Treasury working together to restore investors' confidence in the markets.	Without any government assistance, stable value held up as expected during this volatile period and gained significant cash flows throughout the rest of 2020 as investors were reminded of the value of the downside protection it provides.

Source: SVIA

Regulation

Stable value funds are subject to various industry regulations to ensure their stability, appropriate management, and protection of investors' interests. Some of the basic industry regulations for stable value funds include:

ERISA (Employee Retirement Income Security Act): Stable value funds offered within employer-sponsored retirement plans, such as 401(k) plans, are governed by ERISA regulations. ERISA sets standards for fiduciary responsibilities, reporting, disclosure, and plan administration. It aims to protect the rights and benefits of plan participants.

SEC (Securities and Exchange Commission) Regulations: Although stable value funds are not considered securities, certain aspects of their operation may come under SEC regulations, particularly if they involve investment management or the marketing of stable value products to individual investors. Compliance with SEC regulations helps ensure fair practices, transparency, and investor protection.

OCC (Office of the Comptroller of the Currency) Regulations: OCC regulations apply to stable value funds managed by national banks and federal savings associations. These regulations govern various aspects of fund operations, including investment policies, risk management, capital requirements, and reporting.

IRS (Internal Revenue Service) Regulations: Stable value funds must comply with IRS regulations to maintain their tax-qualified status if offered within tax-advantaged retirement plans. These regulations include rules related to tax treatment, contribution limits, distribution requirements, and plan design.

GASB (Governmental Accounting Standards Board) Regulations: Stable value funds offered within government retirement plans, such as those for public employees, must adhere to GASB regulations. These regulations establish accounting and financial reporting standards for state and local government entities.

FASB (Financial Accounting Standards Board): AICPA Statement of Position (SOP) 94-4-1 and FASB Staff Position (FSP) AAG INV-1. FASB defines the rules under which book value accounting may be used for the investment contracts issued to non-governmental, defined contribution plans. The SOP 94-4-1 guidance was reaffirmed in FASB Staff Position (FSP) AAG INV-1 for the use of book value accounting for investment contracts in 2004.

DOL (Department of Labor) Regulations: The DOL oversees the regulation of employee benefit plans in the United States, including stable value funds offered within those plans. DOL regulations set standards for fiduciary responsibilities, participant disclosures, reporting, and plan administration.

Insurance Regulatory Requirements: Stable value funds may obtain insurance wraps from insurance companies to provide principal protection. These insurance companies must comply with state insurance regulations to ensure their financial stability, solvency, and claim payment capabilities.

FINRA (Financial Industry Regulatory Authority): FINRA is a self-regulatory organization (SRO) that oversees the brokerage industry in the United States. FINRA's primary role is to regulate and enforce compliance with financial industry rules and regulations to protect investors and ensure fair and equitable practices within the securities industry.

Form 5500: This is a filing required by the U.S. Department of Labor (DOL) for employee benefit plans covered under the Employee Retirement Income Security Act (ERISA). Stable value funds offered within these plans are typically required to file Form 5500 annually, providing information about the plan, its investments, and financial condition.

Stable Value Investment Association (SVIA): Established in 1990, the Stable Value Investment Association is a non-profit organization dedicated to educating retirement plan sponsors and the public about the importance of saving for retirement and the contribution stable value can make toward a financially secure retirement. Its members include representatives from all aspects of the stable value investment community including public and private plan sponsors, insurance companies, banks, investment managers, and consultants. It serves as a forum for the exchange of ideas and discussion of issues important to the stable value industry.

Fees

For certain types of products, like pooled funds, fees are expressed as an expense ratio. This makes it easy to compare products. For other types of products, like traditional insurance company general account products, the underlying costs are not reported as an expense ratio. Insurance companies are not required to disclose their general account stable value product fees and can legally represent their fees as zero to investors. The insurance company makes its money from "spread". Spread is where the investments generate more in profit than the cost of deposits. This spread is a significant source of income for general account product manufacturers.

	Individually Managed Accounts	Pooled Funds	General Account Products, or Traditional GICs	Separate Account Products
Asset Ownership	Plan and Trust	Collective Trust	Insurance company	Insurance company but set aside for the exclusive benefit of the plan.
Customization of Investment Strategy	Fully customized to meet the needs of the specific plan subject to issuer approval.	No	No	Fully customized to meet the needs of the specific plan subject to issuer approval.
Transparency into Underlying Holdings and Performance	Full transparency into underlying holdings and investment performance.	Full transparency into underlying holdings and investment performance.	No	Typically disclosed, but this varies by product.
Exit Provisions	Termination date at book value initially set to the fixed-income assets duration but may extend until market-to-book equals 100%. Termination at market value at any time.	Termination at book value after a deferral period, often called a put option. Deferral periods vary but are generally 12-36 months.	Varies by contract but is often not allowed without a market value adjustment.	Termination date at book value initially set to the fixed-income assets duration but may extend until market-to-book equals 100%. Termination at market value at any time.
Fees/Spread	Fee-based products; disclosed with breakdowns available.	Fee-based products; disclosed with breakdowns available.	Spread-based product, compensation is the difference between actual investment earnings and declared rate and is not required to be disclosed.	Varies by product, some are spread-based, and others are fee-based.
Average Duration	3.3 years	3.0 years	3-5 years	4.0 years
Average Credit Quality Range	AA- through AA+	AA- through AA+	A- through AA	A- through AA
Issuer Default	Underlying assets are owned by the plan and retain their market value. Defaulted issuer exposure may be reallocated to another issuer.	Underlying assets are owned by the trust and retain their market value. Defaulted issuer exposure may be reallocated to another issuer.	Claims against assets in the general account are pari-passu with other policy holders and ahead of general creditors.	Claims against assets in the separate account and then, to the extent necessary, against the insurer's general account.
Average Plan Size	$709.4 million	$4.4 million	$335.1 million	$95.4 million