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Opinions on stable value funds?
Old 03-04-2010, 07:35 PM   #1
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Opinions on stable value funds?

I am considering rolling over my 401K into an IRA. I have a decent amount in what I think is generally refered to as a stable value fund or fixed fund. It's currently paying slightly lower than 3%. And there appears to be little risk to the principal value. It's paid a rate relatively in line or a little higher than CD's over the many years I've held it with no fuss or muss.

Should I roll over, this fund would not be availible in an IRA. My Fidelity guy has suggested replacing it with bond funds. Specifically, PIMCO low duration and PIMCO total return. These have some management fees that are slightly unappealing. Alternately, I could do short term or intermediate index funds. All of which have some risk to NAV should interest rates go up. And I'm not seeing a huge advantage to laddered CD's?

I am temped to only roll over non-stable value investments and let the stable value ride. Any help on this one? Thanks!
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Old 03-04-2010, 10:55 PM   #2
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I am temped to only roll over non-stable value investments and let the stable value ride. Any help on this one? Thanks!

That's what I did. My ex employer's 401k offers a private stable value fund that has a 5.1 avg annual return for the last 10 yrs and I could not bear to give it up. Last year was down to 3.12%. Fidelity manages the plan and every time I do a rollover they always want to transfer a percentage of each fund in the old plan to the IRA, so I have to remind them that our summary plan description entitles me to pick specific funds to xfer out of (so I can let the stable value fund ride).
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Old 03-04-2010, 11:17 PM   #3
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We are in the same situation as DH still has his 401k even though he's retired. Last year the stable value fund was at 3.71%. Like jazz4cash, it's had about a 5% average annual return over the last 10 years. We're going to hang on to it as long as Megacorp will let him keep the funds in the 401k. Fido manages this plan as well.
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Old 03-05-2010, 02:05 AM   #4
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Hmm, have a question since stable value was brought up.

My parents are retiring soon, but I am wondering if they are being a bit too conservative. For their portfolio, they have 40% stocks, 10% bonds, and 50% stable value. However, their portfolio only makes up 1/3 of their income stream, the other 2/3's come from SS (phantom bonds). I would add a significant risk factor to their SS if they were under 55, but they are not (e.g., at my young age, I add a 30% reduction factor). As such, stocks only really make up 13% of their overall portfolio, the rest is essentially bonds/cash. In addition, most of their contributions go to finishing off paying their mortgage (a negative bond at 4.5%), so this allocation will only become more conservative over time, not less.

I am worried about this, because I believe we are currently in a very low inflationary period, and will likely be entering into a high inflationary period in the not to distant future.
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Old 03-05-2010, 03:14 AM   #5
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If you like the stable value fund, why not move all your fixed income asset allocation into the stable value fund? If you move money out of the 401(k), it reads like that money will never be able to go into the stable value fund in the 401(k). So this is another case of figure out your asset allocation and set that up.

There are many stable value fund -like investments. TIAA-CREF traditional annuity is like one. The TSP G fund is like one.
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Old 03-05-2010, 07:01 AM   #6
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Over the very long run, stable value funds are effective a high grade, medium term bond fund. That is what the underlying assets are. The difference is that stable value funds have a stable NAV courtesy of a guarantee slapped on the assets by an insurer or other financial institution (sound familiar?), for a fee. So unless you frequently transfer money in and out of such a fund, its not a whole lot different than owning high grade bonds, a similar fund, or CDs. The situation you really want a stable velue fund is when rates rise and the underlying bonds get whacked. Then the guarantees come in the money and you can yank the money out and reinvest in bonds ata a higher rate.
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Old 03-05-2010, 08:06 AM   #7
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If you like the stable value fund, why not move all your fixed income asset allocation into the stable value fund? If you move money out of the 401(k), it reads like that money will never be able to go into the stable value fund in the 401(k). So this is another case of figure out your asset allocation and set that up.
I'm pretty close to that. I do have some others fixed incomes to add a little diversity and get some inflation protection. My asset allocation is OK by me, and I don't want to change that.

I've been retired a couple of years now and everytime I talk to a Fidelity rep about rolling over my 401k, they always recommend rolling the stable value and investing in other fixed incomes. They must have a vested interest in this, but I've not sure what it is?

Indeed, per Brewer12345's comment on rising interest rates and other fixed incomes getting whacked, my read is that there is only one direction for interest rates to go. I can see more advantages to bailing out of the stable value if interest rates were higher.
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Old 03-05-2010, 08:48 AM   #8
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Originally Posted by plex View Post
Hmm, have a question since stable value was brought up.
My parents are retiring soon, but I am wondering if they are being a bit too conservative. For their portfolio, they have 40% stocks, 10% bonds, and 50% stable value. However, their portfolio only makes up 1/3 of their income stream, the other 2/3's come from SS (phantom bonds). I would add a significant risk factor to their SS if they were under 55, but they are not (e.g., at my young age, I add a 30% reduction factor). As such, stocks only really make up 13% of their overall portfolio, the rest is essentially bonds/cash. In addition, most of their contributions go to finishing off paying their mortgage (a negative bond at 4.5%), so this allocation will only become more conservative over time, not less.
Have you asked this question over at Bogleheads? Because I think that (generally older) crowd would clamor that your parents are taking on plenty of risk for their situation. Some would even advise them to liquidate equities now to pay off the mortgage.

I could be overinterpreting your post but from your brief description of the situation, you appear to be focused on the financial aspect of their asset allocation. Your parents may be more focused on the "sleep-at-night" aspect of their asset allocation, and if they can't sleep at night then it just doesn't matter how rational or compelling the financial aspect may be.

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I am worried about this, because I believe we are currently in a very low inflationary period, and will likely be entering into a high inflationary period in the not to distant future.
Well, technically it's none of your business and you certainly won't get any sympathy from them for sharing your worries.

But I understand your situation because my own parents-in-law are 100% in fixed-income assets (perhaps still including a stable-value fund) and they're cutting back their lifestyle to keep up with inflation. (They're in their mid-70s but they have at least 25 years left and perhaps 35.) I know this because they're constantly kvetching about it, yet they're not addressing the mathematical fact that the only inflation-fighting part of their portfolio is their SS COLA. Personally I fear that in 20 years or so we "kids" will end up supporting them.

The only solution I've found to my worries is to set aside a portion of our assets for the eventual possibility of having to pay for their care. Because we're certainly not setting aside a portion of our home for their living quarters!
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Old 03-05-2010, 09:40 AM   #9
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I am worried about this, because I believe we are currently in a very low inflationary period, and will likely be entering into a high inflationary period in the not to distant future.
But social security is COLA'd. So the "phantom bond" is really a "phantom TIPS".
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Old 03-05-2010, 10:31 AM   #10
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Roger,

Also, the money in a 401K is protected from lawsuits ( except divorce) by federal ERISA rules. Any protection for money in an IRA is dependent upon state law.


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Old 03-05-2010, 11:04 AM   #11
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We are in the same situation as DH still has his 401k even though he's retired. Last year the stable value fund was at 3.71%. Like jazz4cash, it's had about a 5% average annual return over the last 10 years. We're going to hang on to it as long as Megacorp will let him keep the funds in the 401k. Fido manages this plan as well.
Megacorp will let him keep it as long as the value is over $5000. However, most big corps change their 401K providers every five years or so, so at some point you will be liquidated out of that fund........sad but true in most cases.........
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Old 03-05-2010, 03:59 PM   #12
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Over the very long run, stable value funds are effective a high grade, medium term bond fund. That is what the underlying assets are. The difference is that stable value funds have a stable NAV courtesy of a guarantee slapped on the assets by an insurer or other financial institution (sound familiar?), for a fee. So unless you frequently transfer money in and out of such a fund, its not a whole lot different than owning high grade bonds, a similar fund, or CDs. The situation you really want a stable velue fund is when rates rise and the underlying bonds get whacked. Then the guarantees come in the money and you can yank the money out and reinvest in bonds ata a higher rate.
I've only read the fine print for the stable value fund in my wife's 401k. So your mileage may certainly vary. However, in her case, the stable value fund was simply an unsecured liability of a single insurance company. Sure the principal value was "stable" but from a risk of default perspective she would be better off owning one of the insurance company's bonds which would be paid off BEFORE the stable value fund in the event of a bankruptcy. I would not be surprised if the insurance company's bonds pay a higher coupon as well!

I would certainly sleep better with a Treasury ladder, an FDIC insured option, a savings bond, or even a diversified junk bond fund, than with my wife's "Stable Value" alternative. Alas, it is the least horrible of the horrible choices in her 401k, so it holds 100% of her contributions until she changes jobs. For now I just think of it as a conduit to eventually siphon money into a Roth IRA at Vanguard.

So while you may have loved your nice consistent high interest rate stable value fund, I suggest double checking the details concerning where your money is actually invested. I fear you are taking way more undiversified risk than you think. I don't think you have really found a free lunch.
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Old 03-05-2010, 11:02 PM   #13
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Megacorp will let him keep it as long as the value is over $5000. However, most big corps change their 401K providers every five years or so, so at some point you will be liquidated out of that fund........sad but true in most cases.........
Yeah...I figure at some point there could be a change. The 401k has been with Fido for about 4 years...hopefully we'll have it a little longer especially since Fido also manages the pension plan.
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Old 03-06-2010, 03:26 AM   #14
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I personally love the, er, well, stability of the stable value fund I have. It's rarely paid less than current inflation and often significantly more. It has never gone down in value (OK, it did when I took some money out of it.) Still, I realize it will never make me rich and has the potential to let me down if hyperinflation ever returns.

For now, it's the 401(k) fund I'm tapping to supplement my regular monthly income. A couple of mouse clicks and I get money in my checking account (minus 20% for the Fed). I don't have to worry about which funds are up or down or decide which funds are (hopefully) about ready to rebound right after I take money out. So, in essence, this is my pseudo money market which I tap to refill the checking account as needed. No fuss, no muss, no worry except maybe inflation. I hope never to give it up unless it eventually goes dry. If that happens at age 101, I guess that's okay w/me...
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