June 2022 / STABLE VALUE
Comparing Stable Value Funds and Insurance Company Products
Plan sponsors may want to consider some key structural features.
Stable value strategies can be accessed through various investment vehicles offered both by insurance companies and by asset managers. The most common structures are insurance company general and separate accounts and portfolios managed by asset managers, which can include both separate accounts and common trust, or pooled, funds.
We believe plan sponsors and their consultants or advisors should consider a number of key structural features when evaluating stable value products. These include:
- Asset ownership,
- Contractual terms,
- Exit provisions,1
- Investment guidelines,
- Fees and crediting rate2 disclosures,
- Management of the portfolios underlying the principal guarantee, and
- Diversification of the principal guarantee.
Regardless of the investment vehicle, investors also need to assess not only the creditworthiness and/or capabilities of the insurance company or asset manager, but also some key structural differences between pooled funds and insurance company general accounts.
As we compare stable value products and structures, we quickly observe distinct differences in a few critical categories—such as crediting rates and portfolio durations3—that are the direct result of differing product structures.
Characteristics of Stable Value Vehicles
(Fig. 1) Pooled funds and general accounts have key differences
Structural Characteristics of Stable Value Vehicles
(Fig. 2) Insurer and asset manager offerings may differ notably
Key Considerations Checklist
(Fig. 3) Issues to evaluate when selecting stable value vehicles
The average credit quality of insurance general accounts may also be lower compared with investment manager pooled funds as a result of structural differences.
As highlighted in survey data from the Stable Value Investment Association (SVIA), insurance products tended to have longer durations and correspondingly higher yields, while pooled funds tended to have shorter durations and slightly lower yields. (Duration is a measure of a bond’s or bond portfolio’s sensitivity to interest rate changes.)
Given that all pooled funds and insurance company general accounts are capital preservation products that provide participants with daily liquidity, there does appear to be some trade-off between interest rate risk (i.e., duration) and plan exit provisions. Insurance products, given their longer durations, typically include a variety of exit provisions that seek to offset some of the interest rate risk borne by the insurance company. Pooled funds also have plan exit provisions (put options) that typically are 12 months or greater and are commensurate with their shorter duration.
As with any investment, it is important that plan sponsors, consultants, and advisors understand their investments and are comfortable with the terms and conditions of the investment vehicle and structure. When considering stable value investment options and evaluating structures, we suggest investors develop a checklist of key questions.
A simple checklist will allow defined contribution plan sponsors and their consultants or advisors to compare stable value products with distinct structures on a common basis. T. Rowe Price and the SVIA both offer a wealth of resources to help plan sponsors and their consultants or advisors equip plan participants with the tools they need to construct an informed investment strategy.
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