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

1. What is the objective of the Stable Value Fund?

The Stable Value Fund provides principal protection and a stable interest rate earned by your account. The primary objective of the Stable Value Fund is preserving principal while earning current income higher than that of money market funds.

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

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

3. How is the principal protection achieved?

The manager responsible for administering the fund will contract with highly rated insurance companies that can provide the principal-protection feature enabling 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?

Every month, The General Board forecasts the interest it expects to receive from the Stable Value Fund's investments. After excluding investment management fees, bank custodian and fund administration expenses, the General Board establishes the rate it will pay on participant accounts for the following month.

The rate represents the annualized rate for that month. The rate will not change again until the following month. 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 my account?

At the end of the month (or at the time you withdraw or transfer your Stable Value Fund investments) the General Board calculates the amount of interest earned each day during the month. The interest rate is calculated based on an actual 365-day year. This means that you will receive interest for every day of the month including weekends. A monthly crediting rate is set, and a daily factor is derived. This factor is applied to your account balance every day of the month.

6. What causes the Stable Value Fund crediting rate to change?

A number of factors influence the crediting rate each month. 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 invested in 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 versus 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. At the end of 2006, certificates of deposit earned in excess of 5%, but the Stable Value Fund paid slightly less than 4.5%. Why isn't the fund earning 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.