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The Fiduciary Focus Blog

The Question No One Asks About Stable Value Funds

Benjamin Smith, CFA 30 November, 2016


57% of  401(k) and 403(b) retirement plans offered  a stable value or investment contract fund to participants in 2015, and  19% of participants offered  this investment actually utilized the fund in their investment allocations, according to Vanguard's How America Saves.  In total, retirement plan participants have invested  nearly $780 billion  in these types of vehicles.  Retirement Plan Sponsors and participants like these investments as stable value, as the name implies, trades with a  constant  Net Asset Value (NAV), and pays  an attractive yield relative to money markets.  But what's the one question no one asks about Stable Value Funds?  

How safe are stable value funds and what market conditions can cause them to fail?

In measuring the health of Stable Value, Guaranteed Insurance Contracts, and separate account funds, a key calculation to review is the Market Value (MV) to Book Value (BV) Ratio. The value at which investors typically buy and sell the fund is the book value which is smoothed by the fund’s contracts. The actual market value of the fund’s holdings can be volatile and differ substantially from the book value. Any time the fund recedes to a level less than 100% (when the fund’s book value exceeds the market value), the recovery to 100% is important. This is due to the increase of potential exposure to the credit worthiness of the fund’s wrap providers any time the market value of the investments underlying the stable value contracts is below the contract (or book) value. Additionally, when MV/BV is less than 100%, participant withdrawals will worsen the MV/BV ratio. For example, if MV = $100 and BV = $105 (MV/BV = 95.2%) and there is a participant withdrawal of $10, MV is now equal to $90, and BV is now $95. The MV/BV ratio is now reduced to 94.7%.

historical mvbv.png

 If you want to read more about comparing stable value funds to money market funds, or newly issued FDIC Insured Bank accounts in retirement plans, click here. 

The problem with a Market Value below the Book Value is that a  participant now has exposure to being made whole by the sponsoring organization or insurance contracts.  As you'll see if the analysis above, the assets of the fund declined in 2007-2008 but also in this particular instance several insurers  went bankrupt.  Participants that wanted their stable dollar back were unable to do so at that time.  An extreme market event prevented those participants who wanted little to no risk, found they had taken more risk  than they had known.  Also, what happens if interest rates rise perpetually? This may also impair the Market Value of the fund and create more pressure on the sponsoring entity's protection to make investors whole.  These are but a few situations a plan sponsor must consider regarding the risk of their stable value fund. 

To measure the health of Guaranteed Accounts and Annuities, the credit analysis is similar to the analysis performed on the Bank Savings Accounts. Many of these providers are insurers so the analysis may be a bit different in the manner of performance, but the overall end conclusions should be similar. One must perform a credit analysis of the sponsoring entity including the risks associated with the underlying investment portfolio or nature of the sponsor’s business. Capital ratios and whether they are improving or declining is a key metric to observe.  Below is a sample analysis .










Total Assets ($M)









Total Capital ($M)









Capital as % of Total Assets









Participants' safety net in this structure  is the level of capital  if losses are sustained in the general account assets.  Basel III accords  request that capital levels of financial institutions be no less than 8% to be considered well capitalized.  As one can see in the above analysis, this  example institution is just reaching this level. 

Make sense? Now, there are other questions that are vital to evaluating the health of your stable value fund and considering all stable investment options for your plan. We hope this blog post provides you   a solid framework you can follow if you're just getting started or if you're concerned about what you may be missing.  If you want to read more on this topic, feel free to download our free  The Risk Free Options are Changing - A Guide for Plan Sponsors   eBook   here.  



Topics: ERISA Compliance, Retirement Plan Menu Design, Investments