(b)lines Ask the Experts – Stable Value Funds Versus Separate Accounts

“In reviewing our Employee Retirement Income Security Act (ERISA) 403(b) retirement plan, the written materials indicated that our stable value fund is a separate account, but the investment provider, an insurance company, has informed me that it is not, in fact an account that contains only the assets of our plan, which is what my understanding of what a separate account should be (at least based on my experience with a prior employer). So why is ‘separate’ not truly separate in this case?” 

Michael A. Webb, vice president, Cammack Retirement Group, answers:  

Interesting question, as you have hit on a common source of confusion related to these types of investments. What your investment provider is calling a “separate account” is actually known as an insurance company separate account, where the “separate” means that the account’s assets are segregated from the general assets of the insurer, offering a degree of protection from the credit risk of the insurer for the plan sponsor. However, it is NOT separate in the sense that it only contains the assets of the plan sponsor. Such accounts are pooled with assets of other plan sponsors, generally in the form of group annuity contracts.

By contrast, separate accounts, as you pointed out, generally consist solely of the assets of the plan sponsor. They are generally established by large organizations who have the purchasing power to obtain an account that is customized to their needs. There is typically a minimum asset size requirement to establish such account, often in the hundreds of millions. Unlike the insurance company separate account, which as a group annuity contract often qualifies as a permissible 403(b) investment as a 403(b)(1) annuity contract, a “true” separate account generally does not qualify as a permissible investment under 403(b), either as a 403(b)(1) annuity contract or a 403(b)(7) custodial account.

Thank you for your question!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.