SVIA

Management Principles

For more than 30 years, Stable Value Funds have played an important role helping retirement plan participants safely accumulate retirement savings.  Stable Value Funds are considered a core investment option, with more than 165,000 defined contribution plans making Stable Value available to millions of participants. Participant assets allocated to Stable Value total more than $821 billion. As an asset class, Stable Value is designed to provide plan participants with stability of principal and accrued interest, daily liquidity, and, over the long term, returns similar to short and intermediate-duration bonds without the volatility associated with bonds.

Stable Value Funds are offered primarily as an investment option within defined contribution retirement or savings plans that provide the plan or plan participants with tax-advantages to encourage long-term savings for specific objectives such as retirement.  Examples of such plans include those created to comply with sections 401(k), 403(b), 457, and 529 of the Internal Revenue Code. These plans typically require that participants direct their own investment allocations among choices offered by the plan, although in certain types of plans the trustee or plan sponsor may make the investment elections on behalf of participants. 

The intent of this paper is to outline the key principles of prudent Stable Value investment management. Not all Stable Value Funds are created alike, nor should they be. Plan participants benefit from different options in terms of Stable Value Fund formats and Stable Value investment strategies. Ultimately, the appropriateness of a Stable Value strategy is judged by its ability to deliver safety, liquidity, and return to the plan participants it serves in a manner that consistently meets the Stable Value Fund’s stated objectives.

This paper includes input from a broad array of industry constituents, including Stable Value managers, Stable Value wrap providers, traditional Guaranteed Investment Contract (GIC) issuers, insurance company General Account and Separate Account providers, fixed income managers, and plan sponsors. This paper summarizes key principles, but it is not intended to be exhaustive in nature. Stable Value is an important asset class that has evolved over the past three decades in response to changing demands from plan sponsors and their participants and to changes in the fixed income marketplace. Stable Value will continue to evolve to meet these changing needs.

 

Key Principles

Stable Value Funds are often considered the conservative investment or one of the conservative investments in a deferred savings plan’s investment lineup.  In many cases, a Stable Value Fund is used by a defined contribution plan to meet the 404(c) requirement calling for “…an income producing, low risk, liquid fund, sub fund, or account…”  Accordingly, Stable Value Fund investments are managed with the objective of maintaining principal stability, providing liquidity at Contract Value for participant-initiated transactions, and generating a positive and reasonably stable rate of return.

In order to serve as an income-producing, low-risk, liquid fund, a prudent Stable Value strategy invests in investment-grade, fixed income instruments, which generally need to be combined with an assurance of financial protection, known as a Wrap Contract, issued by a financially responsible party such as a bank or life insurance company. Stable Value Funds can also use GICs or be a portfolio of GICs. The fund may also include investments that are not covered by a Stable Value Wrap so long as these investments are short-term in nature and can reasonably be expected to maintain principal stability on their own without coverage by a wrap (i.e. cash- equivalent securities).

In practice, a Stable Value Fund maintains principal stability by valuing the fund’s investments at Contract Value – typically defined as the initial principal investment amount plus credited interest, adjusted for subsequent deposits and withdrawals. Plan participants also transact at Contract Value.  As a result, Stable Value Contracts need to comply with applicable generally accepted accounting and audit procedures (GAAP) for reporting Contract Value in the financial statements of the defined contribution plan, including the Financial Accounting Standards Board’s FSP AAG INV-1 for Stable Value funds that hold the wrap contract as a fund asset or SOP 94-4-1 for funds whose wrap(s) are written directly to a qualified plan or its trustee.

A Stable Value investment portfolio generally includes high-credit-quality, fixed income securities and/or traditional GICs.  It favors diversification, balances duration with crediting-rate responsiveness, and maintains a source of ready liquidity. Derivatives may be used but should be in keeping with the investment objectives of fixed income instruments and risk limits for the portfolio.  Each element should not simply be viewed individually but in aggregate within the strategy employed, the exposure to each type of asset, and to each individual security.  Each of these elements is explained in more detail below.[1]

 

Stable Value Funds generally adopt one of three primary formats – Separately Managed Accounts, Commingled Funds and Guaranteed Insurance Company Accounts.

 

Stable Value Funds must comply with a variety of regulatory requirements that guide these funds. Applicable law and regulatory oversight differs by the type of provider and may include the U.S. Department of Labor and specifically the Employee Benefit Security Administration, the Internal Revenue Service, the Office of the Comptroller of the Currency, a number of state insurance commissions, the National Association of Insurance Commissioners, the Securities and Exchange Commission, the Financial Accounting Standards Board, and the Governmental Accounting Standards Board.  A guiding principle in all prudently managed Stable Value Funds is that the Stable Value manager must follow applicable rules and regulations as well as the terms of the investment management agreement and wrap contracts. 



[1] For more information on key elements in a Stable Value Fund, please see SVIA’s Annual Stable Value Fund Investment and Policy Survey.