Winter Storm Nemo’s approach to the East Coast this weekend, threatening snows of epic proportions, should come as little surprise to at least one group of employee benefit professionals: the Annual Joint Meeting of the Great Lakes Area TE/GE Council, Gulf Coast Area TE/GE Council, Mid-Atlantic Pension Liaison Group, Northeast Pension Liaison Group, Pacific Coast Area TE/GE Council, which is in Baltimore Thursday and Friday.

3 of the last 4 years, the same has happened. Those who end up staying in the Inner Harbor Hotels tend to be locked up with little to do but wait it out. Those of us, such as Conni and I and other Great Lakes types, who choose the fine accommodations at Fells Point, tend instead to enjoy ourselves through these delays. Unfortunately for us this year, because of the flu, we have been unable to attend the Meeting, and we send our greetings to our many friends there.

Now to the techie stuff:

I know of no common investment used by retirement plans that is less well defined than the term “stable value fund.” Investment companies, insurance companies, financial advisors, and others all seem to define them a bit differently. They can be found in mutual funds, collective trusts and in group annuity contracts. They can also be “synthetic” in nature, with investment managers cobbling together “stable value funds” within a plan consisting of a number of different investment funds otherwise available under the plan.

To my mind, the annuity contract’s guaranteed fund, or fixed account, has always bee the quintessential stable value fund, as it has guaranteed principal and its returns are generally based upon the performance of an insurance company’s general account. The vast majority of assets within an insurer’s general account are those also found within other so-called “stable value funds”-with the difference being that that insurance accounts were actually guaranteed

Advisors never really took well to the guaranteed account as a stable value fund, often because they often had (though with decreasing frequency now) market value adjustments or withdrawal restrictions imposed under certain market conditions. And then there was the matter that the assets in a general account are subject to the general creditors of the insurance company.

This last point becomes important should an insurer become insolvent. Though it doesn’t happen often, and state bankruptcy law and guaranty associations have done a very good job over time in protecting general account products from an insurers insolvency, it creates a terrible marketing problem for insurers: how do you explain this risk in a competitive bidding situation, where a competing type of stable value fund doesn’t bear that risk? The “mere” fact of a guarantee of interest and principal, I guess, doesn’t cut it (does my cynicism show? As you can tell, I am a fan of these products, if well designed).

The solution to this marketing problem? How do you provide the valuable guarantees while avoiding having to explain that embarrassing problem of insolvency risk? Well, lets put guaranteed account investments in an insurance separate account. (An insurance separate account is what you typically see as the “investment funds” in a 401(k) plan which has a group annuity contract. The assets are generally custodied outside of an insurance company’s general account, and under a separately established investment policy). You see, the assets of a separate account are not subject to the claims of an insurer’s creditors under most state laws (with, of course, certain exceptions).

Without going into too much gory detail, this really could be a bit of sleight of hand if designed wrong. There are many separate accounts which really are invested like stable value funds from collective trusts, for example. But if it has guarantees of principal or interest-the “guaranteed separate account”-the risk just moves down a level, and the investor in the guaranteed separate account is still subject to an insurer’s insolvency risk. So, instead of the insurer standing up for the value of the guarantees, and how well the insolvency risk is managed and priced into the product, the risk is instead hidden and not discussed.

Well, the National Association of Insurance Commissioners is taking a look at this practice, and coming down strongly on the side of making these types of separate accounts subject to the general creditors of the insurer. I guess this means that now insurers will finally need to actively promote the true value of their guarantees, and market the good nature of the commercial pooling of interests-hmm, then again, maybe not……

For those nerdy enough to want to read it, the proceeding of the NAIC can be found here.