PLANSPONSOR - July - August 2023 - 39

INSIDE ANGLE
Stable Value in Focus
Important ways those vehicles differ from money market funds
M
any sponsors of defined contribution
plans
offer
stable
value funds as investment
options within their plan lineups. While
these funds could appear dull from a
participant perspective, they bring myriad
issues for plan sponsors to consider.
Moreover, due to the changing interest
rate environment, many plan sponsors
have been faced with whether to include
a money market fund or stable value fund
as a cash preservation option within the
plan. Below, we provide an inexhaustive
list of considerations that may be helpful
for plan sponsors that are considering or
are already utilizing stable value funds.
Although stable value funds and
money market funds are both generally
considered sound investment options
for principal preservation, there are key
legal and structural differences between
them. In fulfilling its fiduciary obligations,
a plan sponsor should be aware of
such differences.
In general, money market funds are
structured as mutual funds and invest in
a series of short-dated government fixedincome
investments. On the other hand,
a stable value fund is a fixed-income
investment fund managed by an investment
fund manager that typically invests
in higher-rated corporate debt and structured
securities such as asset-backed
securities, commercial mortgage-backed
securities,
residential mortgage-backed
securities and other, fixed-income investments
of that type.
What sets a stable value fund apart
from a bond or similar fund is that
it includes a " wrap contract " that is
usually purchased from an insurer or a
bank. The wrap contract guarantees that
participants investing in the fund will
receive principal and interest even if the
assets held in the fund's portfolio decline
in value. The wrap contract provides that
participants will receive interest credited to
their fund investments at a crediting rate
that may be reset periodically and typically
is guaranteed to not fall below 0%. Thus,
plan participants are able to buy and sell at
" book value " rather than at the fair market
value of the fund's underlying assets.
Certain employer-initiated withdrawals
from the fund, however, may
be subject to some restrictions such as a
market value adjustment
and/or withdrawal
delays. This contractual guarantee
of credited interest for participant-initiated
transactions is a key feature that distinguishes
stable value funds from money
market funds or a bond fund. Thus, key
to keep in mind regarding a stable value
fund are any limitations on withdrawal,
the credit worthiness of the wrap fund
issuer, and the market for issuers of wrap
contracts-i.e., whether there are other
issuers in the marketplace that may replace
an issuer for expiring contracts.
Here are a few more important
considerations:
1) Expected rate of return/risk profile.
Although stable value funds have historically
outperformed money market funds
and are, by and large, considered to be
low-risk funds, they generally maintain a
slightly higher risk profile than do money
markets, given that they invest further out
on the yield curve. In this respect, stable
value funds may be subject to more interest
rate risk, as well as issuer default risk, than
their money market counterparts.
2) Employer-initiated events. Under
a stable value contract, participants may
receive book value, even if fair market
value is less, when the transaction is
initiated by the participant. However,
upon the occurrence of larger, employerinitiated
events-e.g., a plan withdrawal
from the stable value fund-that cause
unanticipated cash flow disruptions to
the fund, plans or the participants will
be unable to immediately receive the
book value of the investment if the fund's
fair market value is less than its book
value. Accordingly, it is important to
understand the length and terms of the
fund's withdrawal limitation and market
value adjustment provisions when these
employer-initiated events may occur.
3) Equity wash restrictions. Stable
value funds also include equity wash
provisions, which normally require a
participant to place assets in the marketplace
before transferring them to a similar
capital preservation vehicle. These provisions
are intended to prevent participants
from engaging in interest rate arbitrage by
jumping between different capital preservation
vehicles-e.g., between money
market and stable value funds. Because
of this, sponsors that offer stable value are
unlikely to also offer money market funds.
Stable value products remain a key
component of defined contribution plan
lineups. However, now more than ever,
plan sponsors should be aware of the key
differences when evaluating a stable value
fund against other options that might be
available in the marketplace.
Steve Saxon is a partner in Groom Law Group, Chartered, and George
Sepsakos is a principal in Groom. Offices for Groom are in Washington, D.C.
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