In stable value, guaranteed investment contracts (GICs), contract value wrap contracts, and group annuity general and separate account contracts are several types of contracts that are used to help deliver to participants the attractive stable value characteristics of principal preservation and low return volatility.
A GIC, is a stable value investment contract issued by an insurance company that usually pays a specified rate of return for a specific period of time, guarantees principal and accumulated interest (i.e., offers contract value accounting), and is benefit responsive to qualified participant withdrawals. These contracts, also known as guaranteed insurance contracts, may be backed by either an issuer’s general account assets, or by separate account assets which are segregated from the general account and are solely for the beneficial interest of the participants in a specific separate account. In all cases, the insurance company owns the invested assets and the obligation to participants is ultimately backed by the full financial strength and credit of the issuer.
A contract value wrap contract is structurally different than a GIC but seeks to provide the same stable value benefits to participants. The key difference between a GIC and a contract value wrap contract is that under a contract value wrap contract the ownership of the invested assets are owned by the plan within a CIT, individually managed account, or segregated in the plan’s name in an insurance separate account wrap. This split structure allows decisions, such as the selection of the wrap issuer, to be made separately from the selection of an investment manager’s services for the investment of the associated assets. To support the contract value guarantee made to participants, this structure relies on both the value of the associated assets and the financial backing of the wrap issuer. Contract value wrap contracts can be issued by banks and insurance companies.
Group annuity general or separate account contracts are different than a GIC but seek to provide the same stable value benefits to participants. The main differences between a GIC and a group annuity contract is that there is no maturity date of the contract and rates are reset on a periodic basis (quarterly, semi-annually or annually). The underlying investments and the wrap provider are usually managed by the insurance company. To support the contract value guarantee made to participants, this structure relies on both the value of the associated assets and the financial backing of the wrap issuer.
The important concept is that stable value uses investment contracts to help deliver the unique benefits for which stable value is known: capital preservation, liquidity, and steady, positive returns.