| Investment Knowledge |
 |
 |
 |
 |
|
401K Stable Value Protection A fund model is presented for several contract subtypes involving stable value protection on 401K tax-sheltered investment plans. The model does not perform pricing, but rather makes an estimate of expected losses. The estimation of fees received in compensation for extending the value protection is not treated in the model, although the loss estimation appears to be consistent with the detailed structure of these contracts. Extending the model to estimate fees is straightforward, and would also simplify certain other functions associated with booking and marking to market 401K wrap contracts, such as estimation of fee loss reserves. The stable value model is aimed at pricing the value of providing value protection on a portfolio consisting of fixed income instruments. The protection provided by the stable value contract is written on any shortfall between the market value of the fund and a defined “book value” which exists when redemptions or withdrawals from the fund are made. The book value of the fund is computed as a function of the “crediting rate”, which itself is a function of previous market and book values as well as the equity and/or fixed income indices that indicate the market value of the fund. The yield on the fixed income component of the protected fund is modeled as the change through time of a single rate which is considered to be the value of a fixed income yield index. Modeling of 401K stable value contracts, commonly called “wraps”, is complicated by the structural features of these contracts and of the funds to which they are applied. 401K plans typically grow and shrink as fund participants make deposits and make withdrawals. The deposits and withdrawals of the participants are modeled as a normal random variable
|