There are multiple investment options within the stable value marketplace which include insurance company general account products, insurance company separate account products, and commingled pooled funds. All three products seek to provide stable income with a focus on capital preservation and liquidity to plan participants within tax-qualified retirement savings plans.
The general account product is a group annuity contract pledging principal protection and participant benefit payments at book value that are backed by the general account of the issuing insurance company. The product offers an explicit guarantee of principal and interest from the insurance company issued directly to the plan. The assets are owned by the insurance company and held within the insurer’s general account. General accounts invest primarily in fixed income and mortgage loans but can have smaller allocations to asset classes including equities, real estate, and private placements.
The separate account product, also a group annuity contract, differs from its general account peers in that the assets are walled off from the insurance company’s general account and thus not subject to the claims of an insurer’s creditors under most state laws. The separate account serves as the first line of collateral to meet the guarantees for the specific plan. There may be secondary support from the insurance company’s general account if the separate account assets are not sufficient to meet the guarantees. The assets are owned by the insurance company. Separate accounts invest primarily in fixed income securities.
In a commingled pooled fund, portfolios are typically made up of bonds that are wrapped by investment contracts (wraps) issued by financial institutions pledging principal and participant benefit payments at book value. The wraps are issued to the trust and not directly to the plan sponsor, hence there is no direct guarantee to the plan. Each plan owns units in the fund and has a prorated legal ownership of fund assets, similar to a mutual fund. These funds can also own traditional guaranteed interest contracts (GICs), separate account GICs (SAGICs) or bank investment contracts (BICs).
All three products offer principal preservation, stability and steady growth in principal and earned interest, and benefit-responsive liquidity for participants at contract value. While the products are benefit responsive for participant-led withdrawals, when a plan sponsor initiates a plan level liquidation the exit language for these vehicles typically ranges from 12 months to five years or more. The plan sponsor needs to fully understand this critical feature and all of the other nuances that differentiate stable value products.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.