With recent money market reforms and the election, your clients might be feeling a lot of uncertainty lately in regards to helping their employees save for retirement.
In addition to these changes, your clients’ employees — especially those nearing retirement — may still be digging out from losses they incurred during the recession. With retirement on the horizon, these employees need adequate savings and are increasingly looking toward more conservative investment strategies to help protect their savings.
As you help your clients make sense of these recent regulations, changes to their overall plan designs may be in order. A guaranteed insurance stable value fund could be the solution they are looking for, as it can help investors who are seeking safety, liquidity and — most importantly — yield in their retirement plans.
What is a guaranteed insurance stable value fund? Be prepared for this important question, as many clients may be new to this product. Guaranteed insurance stable value funds generally refer to a relatively low-risk asset class that focuses on capital preservation and liquidity, while providing steady, positive returns to participants within qualified and nonqualified retirement plans. Guaranteed insurance stable value funds offer participants the liquidity and principal-protection features of money market products, with higher yields that are comparable with intermediate-term bonds.
The reason behind this is guaranteed insurance stable value funds are group annuity products that are comprised of fixed-income securities that protect plan participants from volatile interest rates. What this means is the insurer guarantees a plan participant’s principal and accumulated interest against any loss, including the default of any underlying securities, and promises that the credit rate will never fall below a certain minimum.
Guaranteed stable value funds guarantee an investor’s account balance, which consists of principal plus accrued interest. Their balance increases each day by the current guaranteed interest credit rate. The balance can also increase with any contributions they make, but will decrease with any withdrawals. Regardless, an investor’s principal and interest receive book value, regardless of market conditions.
Because of the product structure and promise of strong guarantees, it’s easy to see why guaranteed insurance stable value funds are offered in almost half of all defined contribution plans in the United States. In fact, stable value investments make up more than $779 billion of assets under management as of December 2015, according to the Stable Value Investment Association (SVIA).
Guaranteed insurance stable value funds have high-quality, well-diversified portfolios of fixed-income instruments (Photo: Thinkstock)
Eye on the 6 benefits
As you dive deeper into plan design and investment offerings in 2017, here are 6 benefits to address with clients regarding how guaranteed insurance stable value funds can assist plan participants with retirement readiness.
Benefit 1: Safety. For plan sponsors looking for a predictable investment option, guaranteed insurance stable value funds could be the answer. This investment vehicle is low risk, as it offers a principal guarantee — regardless of the marketplace volatility.
Benefit 2: Liquidity. Guaranteed insurance stable value funds focus on capital preservation and liquidity that provide steady, positive returns for participants. Plan sponsors will be pleased to learn that, regardless of market conditions, plan participants will receive book value — principal and accrued interest — for their investments.
Benefit 3: Yield. During the 2008 economic crisis, stable value funds were among a select few 401(k) investments that garnered a positive return. The protection from interest rate ebbs and flows is a unique feature all guaranteed insurance stable value funds offer, regardless of the invested asset performance.
Benefit 4: Portability. Most guaranteed insurance stable value funds are fully portable and can be kept as an investment option in the event there is a change in record-keeper. This feature gives plan sponsors and participants more flexibility and contractual freedom.
Benefit 5: Guaranteed credit rating. When a plan participant invests in a stable value fund, the crediting rate is locked into place and it is guaranteed typically every quarter or at least semiannually. Some insurers even guarantee that the credit rating will never fall below 1 percent. Because of this, it’s important to inform plan sponsors that guaranteed insurance stable value funds typically provide higher guaranteed credit rates compared with other stable value products in the marketplace.
Benefit 6: Underlying investments. Guaranteed insurance stable value funds have high-quality, well-diversified portfolios of fixed-income instruments. While these are not the highest-earning investments, this benefit is often appealing to risk-adverse or soon-to-be retiring plan participants who want to have a rough estimate on their return on investment.
All things considered, advisors know better than anyone that any sort of investment vehicle has risks associated with it. However, for plan sponsors who want to offer their employees low-risk investment options to help boost retirement readiness, a guaranteed insurance stable value fund is one to keep on their list of offerings.
Jim Roche is stable asset fund sales director at Standard Insurance Company (The Standard). Read his full bio here.