Measuring Stable Value Risk Structures -- A New Scoring System

Abstract

Since 2008 there has been a major disruption in the stable value market with a Synthetic GIC shortage, with older forms of stable value coming back from the 90’s and 80’s. What is needed is a way to measure the structural risk differences of the wrap or insurance segments of stable value investment options in 401(k) s and related U.S. defined contribution plans. We do have credit ratings on the pieces of the insurance structure, and a rating on the underlying securities, but they do not get to the real distinctions of risk between the newer and older stable value options.

There are three basic categories of stable value: (1) The original General Account or traditional GIC, (2) the Insurance Company Separate Account GIC and (3) the Synthetic GIC, sometimes known as a wrap. What has never been done is to quantify the risk difference between all of these categories, and then the effects of diversification within these categories, and even mixing and matching different structures within the same stable value fund. This new scoring system fills this gap.

Keywords: Stable Value, 401(k), Defined Contribution, GIC, Insurance, Too big to fail

JEL Classification: J26