Introduction: The Origins of Stable Value
Stable value funds are one of the most popular investment options in
defined contribution plans and the most popular conservative or fixed income
option. This popularity stems from
the fact that they offer participants the principal stability of a money market
fund with average returns comparable to those of an intermediate-term bond fund.
The market value risk on participant transactions (the risk of any gains
or losses on assets sold to pay benefits to participants at book value) is borne
by a high-quality financial institution which issues the investment contracts
that fund the option. This principal
stability makes the asset class and excellent diversifier of investment risk as
well as a good investment option for funds which may be needed in the relatively
near term. The recent turbulence in
investment markets demonstrates the importance of these characteristics.
The stable value asset class
is unique in being found almost exclusively in 401(k) and other defined
contribution plans. It evolved from
GICs and other group annuity contracts sold originally to defined benefit plans.
Pension accounting rules gave these contracts book value treatment, which
made it possible to extend principal protection to participants.
Issuers are uniquely able to underwrite this benefit in defined
contribution plans because of the arbitrage constraints which can be imposed by
plan rules [See Qs 19, 22] and
deterrent effect of losing company matches and tax benefits from switching out
of the plan.
