Before the global financial crisis, wrap capacity was abundant and the market supply of wrap insurance contracts greatly exceeded demand. That imbalance drove wrap fees into the single digits, with many wrap providers willing to insure a wide variety of plans and asset classes without much regard for potential risks. This was advantageous to investors because they paid low fees, had solid yields and felt secure.

"More importantly, plan sponsors should educate themselves about the type of events that may trigger a violation of the wrap agreements and cause a potential market-value adjustment, such as a workforce reduction or the addition of a competing option (money market or self-directed brokerage option) within the DC plan. Wrap insurers are spending more time on making sure their exposures are limited and paying greater attention to their exposure to potential risk. As a plan sponsor fiduciary, it's not only important to understand the structure of stable value, such as the underlying investment strategies, but also the wrap issuer market and covenants in place with the wrap insurer," the report found.

The Dodd-Frank Act could affect stable value because it will define whether or not stable-value wrap contracts should be included within the definition of a swap security. Reform could include capital and margin requirements for banks' swap transactions as well as new clearing and reporting requirements. If stable value contracts were to fall under this definition, the additional requirements may deter certain wrap providers from issuing new wrap capacity, which would put even greater pressure on a market that is trying to cope with an already limited supply of insurance wrap capacity, according to Towers Watson.