What 401(k) plan sponsors need to know about stable value funds

Whether you already have a principal preservation option in your 401(k) plan, are considering making a change, or are conducting routine due diligence, acquainting yourself with the basics of stable value funds can help you become a better-informed fiduciary. 

What’s stable value? 

Stable value generally refers to a relatively low-risk asset class that focuses on capital preservation and liquidity while providing steady, positive returns to participants. These funds use insurance and/or banking guarantees and a special type of accounting–book-value accounting–to provide 401(k) participants with liquidity, preservation of principal, and income. 

There are two broad categories of stable value funds: insurance accounts and commingled funds.

Insurance company accounts are agreements between an insurance company and a plan, in which the insurance company credits participant account balances with a guaranteed rate (the crediting rate); maintains a constant, daily per-share price for transactions; and provides liquidity. A plan’s assets are invested in the insurance company’s general account, and the insurance company earns the spread between investment returns and the crediting rate.

Commingled stable value funds, typically offered by trusts or banks, are made up of a portfolio of bonds that is guaranteed by third-party insurance company or bank-wrap contracts. Similar to an insurance company account, a commingled fund preserves capital, credits interest, provides liquidity, and allows for daily purchases and sales at a fixed price, a process accomplished through book-value accounting.

401(k) stable value glossary

Understanding the following concepts and terms will help you feel more comfortable discussing and evaluating stable value:

Benefit responsiveness allows purchases or sales at a known contract or book value.

Book value (contract value) is defined as principal, plus additional deposits, plus accrued interest, less withdrawals or expenses. Stable value transactions are fulfilled at book value.

Competing funds are investments that have an objective similar to stable value, such as money market funds or short-term bond funds. If competing funds are offered in a 401(k) menu, they’re usually subject to restrictions.

Contract holder is the owner of a stable value contract, usually a plan sponsor. 

Credit quality is a measure of the financial strength of a stable value manager.

Crediting rate is the interest rate applied to the book value of a stable value investment contract. This is often expressed as an effective annual yield, and usually reset at established intervals. The crediting rate may be expressed as a gross or net crediting rate. 

Employer-initiated events refer to plan termination or a change in the stable value manager, and result in the withdrawal of plan assets from the stable value fund.

Equity wash refers to the requirement that, before participant balances may be transferred from a competing fund (see above) to stable value, they must first be transferred to a non-competing fund, typically for 90 days. 

Expense ratio is defined as the fund’s operating expenses as a percentage of average net assets. It's usually referred to as the fund’s fee. 

Fiduciary is a party defined by law or designated in a plan document who owes duties of prudence and loyalty to plan beneficiaries. 

General account is a life insurance company investment account, usually invested in stocks, bonds, cash, and real estate, that contains the assets, capital, surplus, and reserves held against liabilities.

Guaranteed investment contract (GIC), usually a group annuity contract, is a stable value contract issued by an insurance company that pays a specified rate of return for a specified period of time, uses book-value accounting, pays benefits to plan participants, and provides annuities, if requested. 

Lesser of book or market value withdrawal refers to the value at which a plan exiting a stable value fund is permitted to do so. Exit usually occurs at the lesser of the book value of the stable value investment contract or the market value of assets backing the book value of the stable value investment contract.  

Liquidity is a measure of the extent to which an investment can be sold or converted into cash at its current price. 

Market-value adjustments are the adjustments to an investment contract’s market value due to employer-initiated events (see above). Alternatively, for some GICs, it’s the adjustment (sometimes known as a surrender charge or surrender value adjustment) to a GIC's market value due to termination prior to the stated maturity date.

Money market funds are mutual funds that attempt to preserve principal and maintain a constant net asset value (NAV) of $1 per share while paying interest. Money market funds consist of securities that mature in less than one year, such as high-quality commercial paper, certificates of deposit, U.S. Treasury bills, and repurchase agreements. 

Put option refers to the ability of a plan to exit a stable value commingled fund at contract value, subject to a notice period. This term is used differently in securities markets, where puts are a type of option. 

Rate resets are the changes that periodically occur to the rate of the interest earned (the crediting rate) on a stable value investment contract, as may be agreed to in the terms outlined in such contract.

Synthetic GICs are made up of a portfolio of assets wrapped (see below) by an insurance contract, an arrangement that ensures book-value transactions. 

Wrap contracts are insurance contracts used in the creation of synthetic GIC. These provide assurance (1) of the book value for that portfolio, (2) of the crediting rate payment, and (3) that participant transactions are executed at book value.

Source: https://www.jhgroupannuities.com/content/INSTANN/en/helpful-terms.html

A fund’s investment objectives, risks, charges, and expenses should be considered carefully before investing. Refer to the Massachusetts contract form for more details about the John Hancock Stable Value Guaranteed Income Fund.

There is no guarantee that any investment strategy will achieve its objectives.

Stable value portfolios typically invest in a diversified portfolio of bonds and enter into wrapper agreements with financial companies to prevent fluctuations in their share prices. Although a portfolio will seek to maintain a stable value, there is a risk that it will not be able to do so, and participants may lose their investment if both the Fund's investment portfolio and the wrapper provider fail

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made here.

 

MGTS-P 41015 GE 11-19/41015   MGR112619503870