The Impact of Changing Interest Rates on the Stable Value Fund Crediting Rate

1. What is the objective of the Stable Value Fund (SVF)?

SVF provides principal protection and a stable interest rate earned by your account. The primary objective of SVF is to preserve principal while earning current income higher than that of money market funds.

2. What types of investments are held in the fund?

The investment managers invest in a broad range of high-quality, low-risk, fixed-income investments. These include U.S. government and agency bonds, corporate bonds, mortgages, asset-backed securities and loans that achieve a positive social purpose, such as those financed through the Positive Social Purpose Lending Program. Most of these investments are short-term in nature. The average maturity is three to four years.

3. How is principal protection achieved?

The fund’s investment managers contract with highly rated insurance companies that can provide the principal-protection feature, which enables participants to transfer or withdraw the value of all contributions and accumulated interest. The General Board and its investment managers have directed the investment of fund assets in a manner that minimizes, but does not completely eliminate, the risk of loss of a participant’s principal. The fund will endeavor to maintain a stable $1 unit price. However, the portfolio cannot guarantee this stable unit price.

4. How does the General Board determine the crediting rate?

The crediting rate is determined based on the actual daily interest earned by the underlying fund assets. The General Board compounds interest daily, and the rate reflects the effect of the daily compounding.

5. How does the General Board determine the amount of interest credited to participants’ accounts?

Interest is calculated daily and credited to participants’ accounts at the end of each month (and/or whenever they withdraw or transfer their entire balance from this fund). The interest rate is calculated based on an actual 365-day year. This means that participants will receive interest for every day of the month, including weekends. The crediting rate, reflecting actual interest earned that month, will be posted to the General Board’s SVF crediting rate Web page at the end of each month.

6. What causes the SVF crediting rate to change?

A number of factors influence the crediting rate. These include earnings from investments held in the fund, the maturity of the investments in the fund and the amount of money flowing into and out of the fund.

First let’s look at the earnings. If the fund has investments that earn 4% interest, and market interest rates have increased to 5%, the fund’s crediting rate may lag behind other types of money market funds. This may occur because some investments in the fund have been purchased at various points in time when interest rates were lower.

Participant cash flow also affects the fund as rates move up and down. If the fund experiences a large cash inflow when rates are increasing, the fund will be able to purchase higher-yielding investments and keep pace to some degree with rising rates. Conversely, large cash outflows when rates are moving higher could have the opposite effect.

The crediting rate will rise more slowly than current market interest rates in a rising-interest-rate environment and drop more slowly in a falling-interest-rate environment. This lag makes stable value investing attractive compared with bond and money market rates when yields drop. Remember—the name of the fund is the Stable Value Fund. This means that the crediting rate that the fund pays is designed to be stable and not fluctuate as much as market interest rates.

7. In some years, returns of certificates of deposit exceeded those of the Stable Value Fund. Why doesn’t the fund earn interest comparable to certificates of deposit?

As discussed above, the fund is designed to avoid significant fluctuations in interest rates. Accordingly, the crediting rate remains relatively stable as interest rates move up and down.