Employer Savings plan with 1.75% return vs Bond Fund

[Bikechuck]

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?

 

[mrfeh]

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.

 

[LOL!]

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.

 

[FIREchief]

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?

 

[ziggy29]

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.

 

[DrRoy]

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.

 

[target2019]

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.

 

[pb4uski]

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.

 

[panacea]

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.

 

[mickeyd]

currently paying a guaranteed minimum 1.75%

How long is the guarantee good for?