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Employer Savings plan with 1.75% return vs Bond Fund
Old 08-19-2016, 06:52 AM   #1
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Employer Savings plan with 1.75% return vs Bond Fund

My employer's retirement plan offers the use of a savings plan currently paying a guaranteed minimum 1.75% from Lincoln Financial.

I am curious about the collective wisdom of the group. Is it advisable to use a fund like this as a partial substitute for short/intermediate term Bond Funds?
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Old 08-19-2016, 07:06 AM   #2
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Given interest rates right now, I'd be willing to accept 1.75% on funds that I would need in 3-5 years. For any longer time horizon, I'd stick w/ intermediate/total bond.
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Old 08-19-2016, 07:27 AM   #3
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It would depend on your time horizon. One can see that intermediate-term bond funds have returned between 5% and 6% for the first 7 months of 2016 which is like 3 years of returns in that stable value fund. So in hindsight, the stable value fund was the loser.

If the rate was close to 3% or 4%, then I think it would be OK. I wouldn't use something with 1.75% myself even for one year. I don't use savings accounts and don't use CDs either.

I also have no fear of losing small amounts of money (say 3% to 7%) in a bond fund. Such a loss would just put me back to where a savings account would be for year, so I'm willing to take my chances. But I only have 30% of assets in a bond fund, so a 5% loss in bonds would mean my total return would be reduced by 5% of 30% or 1.5%. That's doodly-squat in the big scheme of things.
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Old 08-19-2016, 05:05 PM   #4
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Originally Posted by Bikechuck View Post
My employer's retirement plan offers the use of a savings plan currently paying a guaranteed minimum 1.75% from Lincoln Financial.

I am curious about the collective wisdom of the group. Is it advisable to use a fund like this as a partial substitute for short/intermediate term Bond Funds?
Is there a minimum holding period?
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Old 08-19-2016, 05:16 PM   #5
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For a stable value/cash-like position, I'd take that as long as there are no caveats on getting out of it and if the return is more or less guaranteed to not lose principal.
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Old 08-20-2016, 05:06 AM   #6
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Definitely yes. My plan has a similar feature that is close to 2% and I use it. You can not get that return in the bond market without at least a degree of bond price fluctuation and/or greater credit quality risk.
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Old 08-20-2016, 05:26 AM   #7
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Originally Posted by Bikechuck View Post
My employer's retirement plan offers the use of a savings plan currently paying a guaranteed minimum 1.75% from Lincoln Financial.

I am curious about the collective wisdom of the group. Is it advisable to use a fund like this as a partial substitute for short/intermediate term Bond Funds?
I'd look at the expenses associated with the SV and bond funds. If they have 1-yr reports, the answer could be in there. Knowing this may sway your decision.
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Old 08-20-2016, 05:41 AM   #8
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It would depend on your time horizon. One can see that intermediate-term bond funds have returned between 5% and 6% for the first 7 months of 2016 which is like 3 years of returns in that stable value fund. So in hindsight, the stable value fund was the loser. ....
But to be fair, the lion's share of that 5-6% return is due to appreciation which is principally due to changes in interest rates that can evaporate in a heartbeat ..... the income return is only a bit better than the 1.75% the OP can get in a stable value fund.
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Old 08-20-2016, 05:46 AM   #9
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I think it's a nice way to diversify your fixed income portfolio. So you could have a portion in intermediate term bonds, foreign bonds, high yield bonds and some in stable value.
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Old 08-20-2016, 02:53 PM   #10
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Quote:
currently paying a guaranteed minimum 1.75%

How long is the guarantee good for?
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