Stable Value Fund

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A stable value fund is an investment vehicle designed to provide investors with fixed income returns, with embedded protections from interest rate volatility. Stable value funds are considered a low-risk investment, and are popular with 401(k) and 403(b) retirement plans, and 529 tuition savings plans. As of March 2009, individuals have invested $520 billion in stable value funds through 138,000 plans, with investors allocating, on average, between 15-20 percent of assets in such funds.[1]

Stable value funds are generally structured with fixed income securities plus a volatility or principal protection contract, usually held by an insurance company. The embedded protection may be in the form of a guaranteed interest contract (GIC) or a separate account contract with principal protection guaranteed, for a fee, by the insurer.

Stable Value Funds and Regulatory Reform

The Dodd-Frank Act has mandated that the Commodity Futures Trading Commission (CFTC) ans U.S. Securities and Exchange Commission (SEC) design and implement rules and regulations to monitor the previously-unregulated swaps market. The Act calls for the agencies to determine whether stable value contracts fall within the definition of a swap and, if so, whether exempting such contracts from the swap definition is "appropriate and in the public interest." On August 19, 2011, the CFTC and SEC issued a joint statement requesting public comment regarding an exemption for stable value contracts. A final determination is planned for late 2011.[2]

Although stable value funds are considered to be low-risk for investors, the agencies are considering closer monitoring of the industry due to systemic risk of the issuing companies. Prior to its collapse in 2008, American International Group Inc. (AIG) had underwritten several billions of dollars of GICs for stable value funds.[3]

References

  1. What Do You Need to Know about Stable Value Funds In Today’s Challenging Financial Environment?. Stable Value Investment Association.
  2. CFTC and SEC Seek Public Input for Joint Study on Stable Value Contracts. CFTC.
  3. A Question for A.I.G.: Where Did the Cash Go?. New York Times.