It’s important to how they fit into your clients’ investment appetite
by Ken Waineo & Ken BartellMr. Waineo is the investment product and sales director for retirement plans at Standard Retirement Services, Inc. (The Standard). He has more than 20 years of experience working with 401(k), 403(b) and defined benefit and 457(b) plans. Waineo graduated from Wheaton College with a bachelor’s degree in psychology and philosophy and earned his master’s degree from Portland State University. Mr. Bartell is the director of investment research at The Standard. He has more than 25 years of experience in portfolio management and financial services. Kent holds Chartered Financial Analyst® and Associate of the Society of Actuaries designations. He graduated from the University of Michigan with a bachelor’s degree in mathematics and a master’s degree in business administration.
In 2021, $899 billion was invested in stable value assets, representing approximately 10% of the total defined contribution market. With a history of higher returns than their money market counterparts, the benefits of stable value funds make them an attractive asset class. What many advisors may not be familiar with are the differences between two kinds of stable value funds — general account and separate accounts. These types of stable value accounts are particularly attractive to and predominantly used in the small and mid-size 401(K) space.
The benefits of stable value funds include low risk, preservation of principal and accumulated interest, guaranteed returns (for a stated period of time) and liquidity for participants. With a guaranteed rate of return, stable value funds can meet the needs of those who want an investment return with added security. Many investors value steady investment options. That desire for stability will likely increase in conjunction with some recent market shifts. It’s more important than ever, especially with concerns over continued market volatility, people are craving stable investment options. But not all stable value fund options are created equal. While they share many of the same benefits, there are a number of significant differences.
General Account funds are a conservative investment option with a demonstrated track record. With often slightly better rates than their separate account counterparts, general accounts focus on preserving a plan participant’s principal while providing liquidity and steady income. General account funds typically offer:
- Management by one party, which can result in lower fees
- A guaranteed rate of return regardless of how the underlying assets perform (and subject to the claims paying ability of the issuing insurance company)
- Generally higher crediting rates than separate account investments
Separate Accounts differ from general accounts for their ability to provide additional security and protection. Separate account assets:
- Are held separately from the general account assets of the insurer and,
- Provide some additional protections for account holders, should the insurer become insolvent.
However, when compared with a general account fund, a separate account fund usually provides lower crediting rates and there may be additional expenses and management fees associated with multiple service providers, which can result in reduced returns. One of the downsides or challenges of a separate account is not necessarily knowing the exact return your client can expect. The rate of return may be fixed, indexed, reset periodically, or based on the performance of the segregated assets, and there may be less flexibility for fund managers when choosing underlying investments.
Focus On Risk & Benefits
When recommending fund options, it’s important to remind clients of risks and benefits. While there’s no performance guarantees with investments, general accounts are backed by insurance companies — that are both highly regulated and required to have substantial capital to support their guarantee to investors – and have performed favorably over the years, weathering many storms and market environments.
Furthermore, insurance providers manage about half of the industry’s stable value assets. In today’s market environment, advisors may want to consider the benefits stable value funds can offer compared to other investment options. If you decide to include stable value funds in a retirement plan lineup, take time to weigh the differences between general accounts and separate accounts. The differences can impact investment outcomes and your clients will appreciate your effort.
About The Standard
The Standard is the marketing name for StanCorp Financial Group, Inc., and its subsidiaries. StanCorp Equities, Inc., member FINRA, wholesales a group annuity contract issued by Standard Insurance Company and a mutual fund trust platform for retirement plans. Standard Retirement Services, Inc., provides financial recordkeeping and plan administrative services. Investment advisory services are provided by StanCorp Investment Advisers, Inc., a registered investment advisor. StanCorp Equities, Inc., Standard Insurance Company, Standard Retirement Services, Inc., and StanCorp Investment Advisers, Inc., are subsidiaries of StanCorp Financial Group, Inc., and all are Oregon corporations.
 Stable Value Investment Association (SVIA) SQ2021 Stable Value Quarterly Characteristics Survey
 SVIA Quarterly Characteristics Survey for 1Q2020 https://www.stablevalue.org/svia-stable-value-quarterly-characteristics-survey-for-1q2020/