PO Box 804
Whately, MA 01093
413-665-4638
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LANDMARK STRATEGIES PO Box 804 Whately, MA 01093 413-665-4638 |
| Stable Value Market Glossary |
Click on the following words and phrases common to the stable value community for definitions.
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Contractholder option to surrender at contract value with a maximum 12 months' notice that is provided to customers of federally chartered GIC pool collective trusts. The put option constitutes an arbitrage risk for GIC and wrap issuers but is necessary for banking liquidity requirements.
The ERISA regulation which creates standards for prudent plan construction and operation to assure adequate investment selection and participant information in participant-directed plans. The minimum 404(c) standard is three funds which are internally diversified and diversified from each other, with quarterly reporting frequency.
The statement issued by the American Institute of Certified Public Accounting which specifies the conditions under which a defined contribution pension plan may report investment contracts at book or contract value. Each individual contract must be fully benefit responsive, with no meaningful restrictions on participant benefits or transfers imposed by the contract or the plan.
A structured synthetic or separate account GIC designed to credit an interest rate plus the alpha, or excess return earned by the investment manager above a performance benchmark.
A synthetic GIC or "walled off "separate account GIC issued as a diversification alternative to a traditional GIC.
A participating separate account or synthetic GIC in which the plan looks primarily to the credit risk of the underlying assets rather than to the rating of the issuer or manager as with a traditional GIC. Most alternative GICs are asset-backed more than issuer-backed.
The capability of an investment contract to provide participant benefit payments and investment transfers at book or contract value. This is a necessary attribute for each investment in a stable value fund to qualify for contract value accounting. Plan sponsor surrenders or sponsor-initiated withdrawals are typically not paid at book.
Funds paid at book or contract value from a stable value fund to participants upon withdrawal from the plan at retirement, termination, death or financial hardship. Sometimes the term is used broadly to include investment transfers as well.
Bank Investment Contract, technically a bank deposit agreement between the bank and the plan sponsor with features analogous to GICs. BICs which are benefit responsive do not receive FDIC insurance coverage except in 457 plans. BICs which are not benefit responsive are not eligible for book value accounting treatment.
Bid specifications, the data provided with the contract bid request from the customer to the GIC issuer or wrap provider showing plan data such as other investment options in the plan, transfer restrictions, participant cash flows, etc. The bid specs would also typically indicate the type of bid requested by the plan sponsor.
The rate credited on the stable value fund for the reporting period, calculated as a "blend" of the crediting rates on the investment contracts and other assets in the fund.
A layer of liquidity protection in a stable value fund to pay withdrawals before they must be paid from an investment contract under the fund’s withdrawal protocol. Typically the buffer is a STIF, but the term may refer to plan cash flow or some other protective dollar cushion.
A GIC which has only one deposit (and therefore no contribution risk) and, most typically, one payout at maturity (no withdrawal risk). These contracts no longer receive book value accounting treatment in defined contribution plans.
A stable value fund accounting and withdrawal method in which participants are assigned specific ownership shares of each contract based on the proportion that they contributed to the contract. The withdrawal method is also called pro-rata or LIFO by participant.
An interest-rate denominated fund with a reasonable degree of principal safety which poses anti-selection risk to the book value guarantees in a stable value product. Money market and short-term bond funds are always considered competing funds; medium-term bond funds and asset allocation funds may be.
A key regulator of bank collective trusts. The OCC determines reporting standards for bank trusts, as well as liquidity standards.
A restriction on the amount of withdrawals that may be taken from any one contract, usually expressed as a percentage of the contract value, i.e., a "corridor" of 15% would mean that the issuer would only pay book value on withdrawals up to 15% of the contract's current value and any excess could be assessed a market value penalty. Contracts with generalized withdrawal corridors are not considered fully benefit responsive under the AICPA 94-4 statement.
An investment fund managed to a fixed duration and bought as an investment without a maturity.
Investment contracts whose rates are adjusted to reflect the experience on the underlying assets and liabilities. (In some instances, the term is defined narrowly to refer only to participation in gain and loss experience on participant transactions.) Unlike traditional general account experience-rated products, experience-rated synthetics and separate account GICs typically guarantee expense charges and do not assess negative interest rates.
Insurance company general and separate account guaranteed contracts issued to institutional investors other than tax-qualified pension plans. These contracts offer a guarantee of principal, accumulated interest, and future interest for a specified period of time, but do not contain benefit-responsive features. Many are floating-rate instruments with a 30-day put at book issued to money-market and other short-term investment funds or corporate STIF funds. Some are medium-term fixed or floating rate instruments issued to foreign investors. The category also includes "muni-GICs" issued to state or local municipalities to enhance their credit or as short-term investment vehicles for project funds.
Guaranteed Interest (or Income or Insurance or Investment) group annuity contract issued by an insurance company to a tax-qualified pension plan. The contract typically guarantees principal and a zero-coupon interest rate. GICs are issued to both defined benefit and defined contribution plans, but defined contribution sales predominate in a low interest rate environment.
The broker for GIC and other stable value bid placements, who screens quotes and recommends placements for a fee. No fiduciary asset management responsibility is assumed.
An investment manager who places and manages the stable value assets in a defined contribution plan and assumes the fiduciary responsibility for this management.
A commingled portfolio invested in stable value assets that operates like an open end mutual fund with fixed unit share values. Most pools are bank collective trusts, although separate account and mutual fund pools exist. All pool transactions are at contract value. Defined contribution participants have liquidity at book value as in all defined contribution stable value funds. Contract holders in bank collective trust pools are generally offered book value liquidity with notice of up to one year. Mutual fund contract holders have liquidity at book subject to a fixed penalty.
A Guaranteed Interest Contract issued for a period of x years from the receipt of the first deposit to be repaid in (y-1) annual installments at maturity.
State insurance funds that provide protection in case of issuer bankruptcy for some life insurance customers. The funds are supported by insurance companies based on the volume of the particular type of business that they have issued in the state. Coverage varies by state. GICs are typically not covered or covered to a maximum of $5 million per contract holder.
A separate account which has been insulated contractually and/or by insurance regulation from any liabilities of the general account which might exceed assets at insolvency. The purpose is to protect the separate account investor from the credit risk of the issuer.
A stable value fund withdrawal method in which participant withdrawals for benefits and investment transfers are taken from the most recent contract until its fund balance is exhausted, then the next most recent, etc. Contributions to a LIFO contract are made net of participant withdrawals.
A non-recurring deposit of a predictable amount which is made into a GIC or other stable value investment. Usually the source is a maturing contract, but it may be an employer contribution or other amount known in advance.
National Association of Insurance Commissioners, the organization that establishes general standards for state insurance regulations. The NAIC established risk capital standards for insurers and maintains statutory accounting standards.
The time period for which a precise dollar amount of contributions or deposits are accepted at the guaranteed rate on a GIC or other stable value product. Amounts in excess of this are returned to the plan at the end of the window period; shortfalls must be made up by the plan from subsequent period cash flows.
A GIC which guarantees an interest rate only for a short period of the contract and thereafter adjusts the credited rate for asset and plan experience. On current day separate account versions, expense fees are guaranteed and experience is typically amortized to the contract’s maturity or duration. No negative interest may be assessed if the contact is to receive book value accounting.
Specification of a stable value asset requiring that principal net of withdrawals be paid down to a specific amount at each withdrawal period. The concept is used with plans with high withdrawal risk. The idea is to reduce risk charges by creating a predictable pattern of principal reduction that is consistent with or greater than the expected withdrawal pattern of participants. If the withdrawals don't occur, the funds are paid back to the plan sponsor in any event, allowing the insurer to immunize funds with certainty and still accommodate a large volume of anticipated withdrawals.
A stable value withdrawal method under which participant withdrawals and benefit payments are taken proportionately from all benefit-responsive investment contracts in the fund in relation to their relative size at the time of the withdrawal.
A GIC withdrawal method in which withdrawals are taken proportionately from each asset in the fund only after net plan cash flow for the period has been exhausted. The period involved may be monthly, quarterly or longer.
A Qualified Professional Asset Manager as defined by ERISA and granted exemptions from specified prohibited transactions with plans by the Department of Labor. Utilizing an independent QPAM to select the wrap provider and asset manager in a synthetic GIC arrangement reduces a plan’s exposure to ERISA difficulties associated with the purchase.
An annual NY state annuity certification regulation requiring that issuers certify that assets are adequate to pay all outstanding liabilities under 7 interest rate scenarios without assuming any new sales and without the use of surplus assets. Failure to certify requires establishing additional reserves. The regulation applies primarily to General Account products.
An annual NY state certification requirement for participating separate account guaranteed annuities The separate account certification requires demonstrating that the market value of assets (less required "haircuts" for risk capital) is adequate to meet the market value of liabilities at all times.
A NY state regulation for disclosure of information on rate crediting and contract surrender on participating annuities and GICs. It also establishes surrender requirements for accounts without fixed guarantee features. The regulation need not apply to contracts which certify under regulation 128.
In typical stable market usage, a book value GIC issued from a "walled off" separate account of an insurance company, which insulates its owners from any liabilities of the general account at insolvency of the issuer. The most typical version provides book value protection to participants at the time of the withdrawal but passes all investment and plan cash flow risk back to the plan via interest rate adjustments. Expenses are guaranteed.
Interest paid to the plan on a regularly scheduled periodic basis, as contrasted with the more typical interest compounded to maturity on a GIC.
A short term investment fund maintained as part of the stable value fund to be the first source of benefit and withdrawal payments. The STIF must usually be maintained at a specified percentage of the fund (i.e., 5-10%). They are most common in pro-rata plans.
A synthetic or alternative GIC backed by an actively managed portfolio designed to replicate or outperform a specific market index or other measurable investment target. Most involve interest rate swaps or derivative structures.
The charge typically assessed to a pre-maturity withdrawal request initiated by a plan sponsor or trustee rather than a participant. The typical provision on a GIC is a surrender at the lesser of book or "market", where market is likely to reflect some charges in addition to that for interest rate change. Participating GICs, including separate account contracts, typically allow surrender at market value and/or surrender in 5 even installments at book value because of NY regulation.
A stable value investment in a defined contribution plan consisting of two components: 1) an asset or investment fund share owned directly by the plan and 2) a wrap agreement (often provided by someone other than the investment manager) that maintains all participant withdrawals at book value and may provide other risk protections as well. The two pieces must be contained in one asset agreement to receive contract value accounting.
A plan rule limiting participants' ability to withdraw money from one or more fund options of the plan. The plan may restrict the frequency of a participant's withdrawals or movements between particular funds.
One or more wrap contract(s) (see wrap) used to cover a large number of buy and hold assets and/or actively-managed portfolios in a stable value portfolio. Where there is more than one wrap utilized, contract terms are made as similar as possible and withdrawal risk is shared equally. These arrangements are relatively rare and found in very large stable value funds invested for a single plan.
A separate account which has been insulated contractually and/or by insurance regulation from any liabilities of the general account which might exceed assets at insolvency. The purpose is to protect the separate account investor from the credit risk of the issuer.
A requirement that a participant transfer to or from a competing fund to a GIC not be made directly but be "washed " through an equity fund for a period that is typically three months or longer.
The time period for which an unknown volume of deposits is accepted at the guaranteed rate on a GIC or other stable value product.
In a stable value fund, a contractual agreement to maintain principal and benefit payments and participant investment transfers on a specified asset or group of assets at book or contract value. The form of a wrap may be a swap agreement, asset purchase agreement, asset management agreement, guaranteed annuity contract, or other agreement. Most wraps are participating agreements that guarantee the participant liquidity at book while smoothing gains and losses on assets and participant withdrawals into amortized adjustments of the future crediting rate.Copyright © 2007 Landmark Strategies
