Is calling a stable-value account a “fund” misleading?

[Peter Gulia]

To provide a retirement plan’s participants an investment alternative they perceive as having no risk of investment loss, the plan uses an insurance company’s separate account and group annuity contract.  The separate account has the one plan as the account’s only beneficial owner.  The annuity contract provides each quarter-year a credited interest rate determined by amortizing investment gains, losses, and values over a duration that approximates an estimate of an average duration for the investments held for the separate account.  The contract has delayed payments or a market-value adjustment if the plan leaves the insurer when the separate account’s market value is less than the book value credited to participants.

 

The plan’s communications writer wants to label this participant investment alternative the stable-value fund.  Everything else in the plan’s menu is a registered-investment-company fund or a bank’s collective trust fund.  The writer thinks it’s less confusing if the communications use the word “fund” to refer to every investment alternative.

 

But another person (not me) says it’s misleading to call an investment alternative a fund if it’s not legally a fund.  She wants to use stable-value account.  She says “account” uses language that insurance law uses.  (She suggests also using “investment alternative”, which ERISA’s 404a-5 rule uses, as the general reference over the investment funds and the stable-value account.)

 

What do you think?

 

In considering whether to use or avoid the word “fund”, does it matter that amounts credited to a participant’s plan account can be more than or less than those that would result from the separate account’s recent investment results?

 

Do you think “fund” is misleading?

[Bill Presson]

I would default to what the insurer calls it.

FWIW, I've seen most insurance companies call it a stable value fund.

[Peter Gulia]

Bill Presson, thank you for the help (and for giving me another way to think about the questions).

The insurer doesn't have an advertising or "product" name for this contract.  And the insurer allows each plan to name the thing.

Others' thoughts about whether "fund" is misleading or helpful?

 

[MoJo]

It is a "fund" even though it may not be named a "Fund."  The term "fund" simply means a commingled  investment pool - and can be a "Registered Investment Company" (the '40 act term for a "fund" - which doesn't use the terminology of "fund" as part of the "official" legislation (although the word may be in there somewhere)), a common or collective "trust" fund, or a separate or general account "fund" offered by an insurance company.

I can't tell you the "documented" name of our general account product that provides a "stable value" for plan participants, but we call it the "Stable Value Fund" - or SVF for short.

[jpod]

I guess FGC's concern is that the word "fund" implies that it is some sort of collective investment vehicle, but apparently that is not the case here.  The plan has entered into a contract with the insurance company, the insurance company's obligation to the plan is based on how much the plan invests pursuant to the contract, and then there is a plan-level allocation to participants of the amount due to the plan under the contract, i.e., principal plus interest calculated pursuant to the contract.  Nevertheless, I would have no hesitation in referring to it as a "fund" in casual communications, provided that it is described in a more technical fashion in ERISA-required disclosures (just like 40 Act-registered mutual funds and 3(c)(11) CITs are described).  

[Peter Gulia]

MoJo and jpod, thank you for your help.

 

A concern the committee member described is her view that “fund” suggests collective or common investment, and this separate account has only one owner.

 

The word “account” too can be misleading because under the unallocated group annuity contract’s terms only the retirement plan, not any participant, has an account.  Likewise, the insurer has no obligation to a participant, and a participant has no right regarding the insurer.

 

And a participant’s investment result is related, but not tied, to the plan’s past results and anticipated values, which can include periods for which the participant had or will have no portion (or a different portion) of his or her plan account allocated to stable-value.

 

Another voice on the committee suggested “stable-value contract”.  But this seems inapt for participant communications because there is no contract with a participant, and a participant’s investment result is not tied to the plan’s results.

 

I intend to suggest using “fund” until someone finds a word that, with clear reasoning or some persuasive evidence, can be shown as less misleading than “fund”.

 

[MoJo]

FGC and JPOD:  By the "definition" you posit of a "fund" having multiple investors or owners, I would suggest to you that it *is* a multi-owner offering by the insurance company.  As a "general" account product, it *must* be offered to qualified investors (plans, etc.) just as a collective (bank) trust is.  For an insurance company to offer it, it must have state level regulatory approval in each state in which the offering is made, and the "template" contract used for the offering must be filed with the regulator, to ensure each investor has basically the same rights and features (there is some "variable" language allowed in the contract, but that is "limited")   Each investor has enters into a "contract" which is substantially identical to that filed with the regulators and merely is the governing instrument that spells out the terms and conditions of the investor being able to "invest" in the "fund" much as an account application functions with respect to a mutual fund.   Each "contract" does NOT imply a separate vehicle into which that investors money will be invested.  It is a "collective" managed pooled investment vehicle.

[XTitan]

I suppose the use of the term "fund" could be misleading absent adequate disclosure.  I'm looking at one insurance company's 401(k) platform where the stable value offering is listed as a fund but then discloses that "the fund is not a mutual fund."  A second insurance company's platform also uses the term fund for its stable value offering but has significantly more disclosure that this margin is too small to contain.

[jpod]

MoJo, I am not an insurance business expert but FGC said this was a "separate account" product so I ran with that.

[Peter Gulia]

MoJo, thank you for the further observations.

The originating post describes a separate-account contract.  Although some insurance company separate accounts have more than one owner, this separate account has only one owner, the one retirement plan.

Further, the separate account's governing document includes an investment policy statement specified by the retirement plan's fiduciary.  (The insurer quotes its fee after considering the plan's investment policy.)

But again, I'm suggesting it's okay for participant communications to call it a fund.

 

[MoJo]

10 minutes ago, jpod said:

MoJo, I am not an insurance business expert but FGC said this was a "separate account" product so I ran with that.

A separate account is still a "fund" and unless the plan is huge, separate "separate accounts" are not created for each plan.  Multiple investors will still invest in a single separate account "product."  The only significant difference between a general account and separate account product is that 1) a "general account" is an insured product where the entire assets of the insurance company back the obligation to pay, while a separate account is not part of the balance sheet of the insurance company and is merely a segregated pool not "insured" nor subject to the claims of the insurance company's creditors; and 2) the insurance company is the "investment manager of the general account product and hence a "fiduciary" with respect to plans that invest in it, where a separate account product is treated more like a mutual fund with respect to the investment manager not being a fiduciary.

[MoJo]

34 minutes ago, XTitan said:

I suppose the use of the term "fund" could be misleading absent adequate disclosure.  I'm looking at one insurance company's 401(k) platform where the stable value offering is listed as a fund but then discloses that "the fund is not a mutual fund."  A second insurance company's platform also uses the term fund for its stable value offering but has significantly more disclosure that this margin is too small to contain.

Well, there really is nothing magical about the term "fund" - as it could imply more than one owner, or even more than one investment.  The '40 act doesn't call the entities created by is "mutual funds" but rather Regulated Investment Companies.

In common parlance, it's still a "fund" (general account, separate account, many owners or just one).

[BG5150]

Could you call it Stable Value Investment?

[Peter Gulia]

BG5150, thank you.  I like calling it stable-value investment.  But some on the committee dislike it; they believe participants would be upset because they don't perceive stable-value as an investment.

 

[MoJo]

18 minutes ago, Fiduciary Guidance Counsel said:

BG5150, thank you.  I like calling it stable-value investment.  But some on the committee dislike it; they believe participants would be upset because they don't perceive stable-value as an investment.

 

"Stable Value Option"?

[Larry Starr]

On 10/15/2018 at 4:16 PM, Fiduciary Guidance Counsel said:

To provide a retirement plan’s participants an investment alternative they perceive as having no risk of investment loss, the plan uses an insurance company’s separate account and group annuity contract.  The separate account has the one plan as the account’s only beneficial owner.  The annuity contract provides each quarter-year a credited interest rate determined by amortizing investment gains, losses, and values over a duration that approximates an estimate of an average duration for the investments held for the separate account.  The contract has delayed payments or a market-value adjustment if the plan leaves the insurer when the separate account’s market value is less than the book value credited to participants.

 

The plan’s communications writer wants to label this participant investment alternative the stable-value fund.  Everything else in the plan’s menu is a registered-investment-company fund or a bank’s collective trust fund.  The writer thinks it’s less confusing if the communications use the word “fund” to refer to every investment alternative.

 

But another person (not me) says it’s misleading to call an investment alternative a fund if it’s not legally a fund.  She wants to use stable-value account.  She says “account” uses language that insurance law uses.  (She suggests also using “investment alternative”, which ERISA’s 404a-5 rule uses, as the general reference over the investment funds and the stable-value account.)

 

What do you think?

 

In considering whether to use or avoid the word “fund”, does it matter that amounts credited to a participant’s plan account can be more than or less than those that would result from the separate account’s recent investment results?

 

Do you think “fund” is misleading?

No, I think it is NOT a fund.  It is an account. OR a "stable value fund". The modifier is important.  How many legs would an elephant have if you called its tail a leg? FOUR!

[BG5150]

19 hours ago, Fiduciary Guidance Counsel said:

BG5150, thank you.  I like calling it stable-value investment.  But some on the committee dislike it; they believe participants would be upset because they don't perceive stable-value as an investment.

 

These guys really love splitting hairs!

[BG5150]

Call it the Stable Value Fund Investment Account.  Or the SVFIA.

[CJ Allen]

Interesting.  Based on certain lines of thought in the discussion thread:  1) Why would a Collective Investment Trust be named a 'fund'?  2)  Why would a pooled separate account be named a 'fund'?  If unallocated general account Stable Value would have other investors, would it be more comfortable to be named a 'fund'?  Would the plan change the name as other investors invest or leave Stable Value?

IMHO, if participants would perceive the term 'funds' as the differing options to invest in the plan to earn income, then let it be called 'fund'.  Otherwise, there is a chance the term shouldn't be used at all and changed to "investment".  "The plan has 30 investments available with which to diversify" as opposed to "The plan has 29 funds and 1 account/investment with which to diversify". 

[MoJo]

21 minutes ago, CJ Allen said:

Interesting.  Based on certain lines of thought in the discussion thread:  1) Why would a Collective Investment Trust be named a 'fund'?  2)  Why would a pooled separate account be named a 'fund'?  If unallocated general account Stable Value would have other investors, would it be more comfortable to be named a 'fund'?  Would the plan change the name as other investors invest or leave Stable Value?

IMHO, if participants would perceive the term 'funds' as the differing options to invest in the plan to earn income, then let it be called 'fund'.  Otherwise, there is a chance the term shouldn't be used at all and changed to "investment".  "The plan has 30 investments available with which to diversify" as opposed to "The plan has 29 funds and 1 account/investment with which to diversify". 

In the words of my generation, "Right on!"