Risks and Rewards of Stable Value Funds

Stable value funds are a cornerstone of many retirement plans, offering participants the dual benefits of principal protection and steady returns. In this section, we explore two primary structures within stable value funds such as wrap contracts and Guaranteed Investment Contracts (GICs) and examine the unique risks and protective features associated with each. Understanding these mechanisms is essential for plan sponsors and participants alike, as it enables informed decision-making and effective risk management in pursuit of income stability during retirement.

Both wrap contracts and GICs carry provider/issuer risk and event risk. Wrap contracts add an extra layer of risk related to the underlying asset value and involve more parties, while GICs are simpler but rely entirely on the insurer’s financial health. Both structures are designed to protect principal and provide steady returns, but participants should consider the financial strength of providers and the specific contract terms when evaluating risk.

Wrap Contracts

Wrap contracts have provider risk.  The provider’s guarantee depends on the financial strength of the wrap issuer (bank or insurance company). If the issuer defaults or becomes insolvent, participants may lose the contract value guarantee.

Wrap contracts have asset value risk.  The guarantee is supported by both the value of the underlying assets and the wrap issuer’s financial backing. Significant declines in asset value can increase risk to participants.

Certain plan-level events (e.g., large withdrawals, plan changes) may trigger conditions where benefits are paid at less than contract value.

Wrap contracts involve more parties (investment manager and wrap issuer), which can add complexity and potential for misalignment.

Guaranteed Investment Contracts (GICs)

The issuer of GICs may represent an issuer risk.  The guarantee is provided solely by the insurance company issuing GIC. If the insurer defaults or becomes insolvent, the principal and interest guarantee may be lost.

The account structure is important.  GICs may be backed by either the insurer’s general account or separate account assets. Separate accounts can offer more protection, as assets are segregated for the benefit of participants.

Similar to wrap contracts, certain events may result in benefits being paid at less than contract value.  GICs are typically simpler, with the insurance company both managing assets and providing the guarantee.

Below is a comparison of the risks embedded in wrap contracts and GICs.

Risk Type	Wrap Contracts	GICs (Guaranteed Investment Contracts)
Provider/Issuer Risk	It depends on financial strength of wrap issuer (bank or insurance company). If issuer defaults, guarantee may be lost.	It depends on financial strength of insurance company. If insurer defaults, guarantee may be lost.
Asset Value Risk	Guarantee relies on both asset value and wrap issuer’s backing. Significant asset declines increase risk.	May be backed by general or separate account assets. Separate accounts offer more protection.
Event Risk	Certain plan-level events (e.g., large withdrawals, plan changes) may trigger benefits paid at less than contract value.	Similar risks of certain events may result in less than contract value paid.
Complexity	Involves both investment manager and wrap issuer, adding complexity and potential for misalignment.	Simpler structure insurance company manages assets and provides guarantee.
Benefit Responsiveness	Designed to allow participants to transact at contract value, protecting against market volatility.	Also benefit responsive, allowing transactions at contract value.

While GICs provide strong protection against event risk through contract terms, benefit responsiveness, and regulatory oversight, certain extraordinary events may still result in benefits being paid at less than contract value. Careful plan sponsor selection and understanding of contract provisions are important for managing these risks.