If you have a 401(k), 403(b), or similar retirement plan, you may have an investment option called a stable value fund. Sometimes it goes by a different name like Guaranteed Pooled Fund, but they are always marked as a conservative investment. The pitch is basically the higher interest rate of longer-term bonds, with the relatively liquidity and stable principal value of a money market fund. I explored the risks and rewards of stable value funds before and currently hold them as part of my bond allocation.
My specific stable value fund is run by Transamerica Financial Life Insurance Company (TFLIC) and offered an interest rate of 3.5% for all of 2010, which was much higher interest than any other similar bond investment was going to pay me. Then they told me that until February 28th, 2011, the interest rate would be 3.0%. Finally, I just received a letter that told me that the interest rate from March 1st to December 31st, 2011 would be lowered to 1.8%.
So, should I stay or should I go? Interest rates continued to drop in 2010, so I did expect them to lower their rate.
Online savings accounts like Capital One Consumer Bank are paying around a low 0.75% APY, and I have no access to something like that in my 401k. They recently announced a self-directed option through Schwab, although I need to find more details about how much transaction costs would be. The Vanguard Short-Term Treasury Fund (VFISX) is currently yielding only 0.66%. Taking a look at current Treasury yields shows the 2-year at 0.78% and the 5-year at 2.30%.
So the interest rate itself is still pretty competitive relative to other “safe’ investment options. My other bond alternative inside the account is the huge PIMCO Total Return fund (PTTRX) with a 3.12% yield and 4.8 year duration, which did pretty well for me when I had it but I worry about asset bloat with $240 billion is assets, manager risk, and interest rate risk.
In the absence of any significantly better options, it looks like I’m staying put.
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I don’t know what other options are available in your retirement account but 1.8% is awful. With my wife’s retirement account we are still getting 3.5% until March 31st 2011 with MetLife. I wonder how much will it decrease then? Based upon your account it’s not looking too good. I too will have to decide is it worth the risk in putting the money into bond funds or just leaving it where it is. Not an easy decision based upon how low the return is and the possibility of increases in bond yields.
I assume you look at your assets across all accounts (tax deferred and taxable).
So I also assume that you can get a better fund option for fixed income in a different account and take the money out of the stable value fund in this account and transfer it into a low cost equity index fund, making the reverse swap in the other account(s).
Obviously, if this account only has bad options (and I don’t like PTTRX) onthe fixed income AND equity side, then the SVF is the best option. Seems unlikely though…
I think it’s pretty misleading to consider stable value funds as safe as treasuries.
I’d never do bond funds if I was looking for stable income. I’d rather just buy the bonds outright. Bond funds can go up or down based on the market.
@Investor Junkie – Yes, let me know what you get after 3/31.
@enonymous – But what if you’re looking to fill the bond portion of your target asset allocation inside a tax-deferred account?
@Andy – I don’t recall ever saying that? I wrote a whole post about the risks, linked in the post above.
@Mike – You can control maturity better with single bonds, but then you have lack of diversification unless you are buying Treasuries. Also, if you sell before maturity, you’ll have to deal with the same issue of the bond value going up or down based on the market.
Good thing I would never sell before maturity. Bonds should be used to store wealth. They will offer the stated return if you don’t mess with it. The term “buy and hold” should apply.
I wouldn’t worry so much for diversification. I was fairly diversified (Stocks) during the crash and that didn’t really help. My corporate + muni bonds weren’t affected though since I held them through maturity.
How many bonds do you hold? I might be comfortable with at least 50 different bonds, otherwise what happens if one of your corporate bonds defaults? I do hold some individual TIPS bonds currently.
I don’t hold many because I am no where near retirement. The risks are low if you pick investment grade bonds or municipals. I believe Moody’s says its about 2% default for investment grade bonds historically. Almost nill for investment grade municipals. If I were in retirement I would definitely diversify into more bonds. Your number seems about adequate.
Stay in the stable income fund, holding on to principle even at lower rates is necessary…the federal reserve is forcing higher risk on everyone.
1.8 is kind of conservative relative to other Stable Value Funds offered by insurance companies who do the recordkeeping for 401k’s and 403b’s. Remember, the yield you get is a function of the interest rate market and the spread that the insurance company wants in order to make money off all the employee’s monies in the Stable Value Fund. It is also a funtion of the agreement your employer signed with TransAmerica. There should be a floor rate, or lowest it can go contractually. Ask your employer for that number or you can find it in the Plan Documents. I work with lots of Stable Value Funds and right now they range from 1.75% to 3.3%, it just depends on the agreement that employer set up when they first signed the contract with the recordkeeper.
as to your previous comment
I assumed that you had better bond offerings in your other tax-deferred accounts (Roths, SEP IRAs etc) – if that isn’t the case (or you don;t have enough room – in which case your portfolio would be very very large!), then you are stuck.
otherwise, this should be quite easy to manage (given your high equity allocation)
“@Investor Junkie – Yes, let me know what you get after 3/31. ”
@Jonathan -Are you saying that this will drop dramatically ? would it be a good time to get cover now ?
@Jonathan: It stayed at 3.5%, so I’m not moving the money.
Sorry I misread their web site. It was 3.5% APR for LOANS via the retirement account. The rate is now 3.0%.
Why you prefer VFISX which gives less return for bonds instead of VFSTX?
Any theories for not going with VFSTX? The dividend is also better that VFISX and rate also has been stable
Would love know your opinion
JR