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Home > Library > Stable Times > Volume 4, Issue 1  The quarterly publication of the Stable Value Investment Association First Quarter 2000 • Volume 4 Issue 1 What AICPA SOP 94-4 Hath Wrought: The Demand Characteristics, Accounting Foundation and Management of Stable Value FundsBy Paul J. Donahue, PRIMCO Summary AICPA SOP 94-4 is the foundation of the Stable Value Option ("SVO"). A SVO guarantees the principal and accrued interest of participant benefit payments and transfers. The Article analyzes market demand and identifies legitimate participant expectations. It concludes that guarantee of principal is the bedrock of the SVO's appeal to the conservative investor. Level of return, though important, is secondary. The Article establishes the absolute superiority of SVOs over money market funds as retirement income vehicles.On the basis of this economic analysis, the Article develops the implications for SVO portfolio management policy and practice. The Article discusses in detail AICPA SOP 94-4. It concludes that the basic requirements do full justice to legitimate participant expectations, but that exceptions permitted by example unduly erode the guarantee. The Article moves on to discuss contract provisions required, in view of marketplace assignment of risks, to assure that SVOs meet participant expectations. It concludes that assignment of default risk to participants is economically efficient since otherwise credit analysis would be wastefully duplicated. It notes that failure to constrain permissible issuer termination rights is the greatest weakness of SOP 94-4, since an issuer right to terminate at will makes a guarantee worthless. The article sets out the conditions that should exist to justify termination for cause and applies them to "termination for cause" clauses frequently seen in practice. The Article finds limits on the guarantee for "employer-initiated" events economically unsound, but those for "plan events" economically justified. The Article favors arbitration provisions, and comments briefly on other contract clauses. The Article discusses the evolution of SVO management from insurance company blended rate products, to plan-specific new money rate contracts, to Guaranteed Investment Contracts, to insurance company separate accounts, to guarantee contracts "wrapping" portfolios of readily marketable assets. The Article goes on to discuss the formulation and implementation of investment strategy for SVOs in today's environment. It emphasizes the importance of credit analysis in view of the need to preserve principal, and the importance of investment objectives and guidelines that reflect the realities of the SVO's market demand.
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