Did I Do Something Stupid

[nico08]

Early in 2014, I took money out of a deferred compensation plan (457b) and put that money into investments with Vanguard, where the majority of my investments are held. My rationale for making the switch over to Vanguard, at the time, was that the deferred compensation plan had, on average, higher expense ratios for its investments.

Well, now I have been thinking about putting some, or all, of my bond allocation into a stable value fund. I see that the deferred compensation plan offers a stable value fund. Annualized Returns Stable Value Fund- YTD 1.89, 1 year 2.52,3 year 2.95,5 year 3.51. The only somewhat similar fund that I could find with with Vanguard, was a Money Market fund VMMXX-
YTD 0, 1 Year .01, 5 Year .04, 10 Year 1.63.

Is it better to leave money in 401k/457b plan after you have left the employer? I thought by switching to Vanguard I was doing something smart, consolidating my investment portfolio and getting lower expense ratios.

 

[jerome len]

Generally, only programs like 401k retirement funds offer stable value funds.....looks like that is true of 457b as well. You cannot access stable market funds otherwise. You CAN take a little additional risk and go into a short term bond fund......if you're in a high tax bracket look at Vanguard muni short term, if not look at simple short term bond fund. Sorry if you're now unhappy with your choice.

 

[2B]

Without reading the prospectus, I don't know for sure what your "stable value" fund is in your 457b. Many of these are actually insurance contracts (technically annuities) backed by an insurance company. Typically, they are also "guaranteed" by a state's insurance pool which shouldn't be confused to be backing by the actual state. It's the other insurance companies that do business in that state with the same product. There have been a few rare cases where the "stable value" wasn't realized. I don't believe it has happened recently but I could be wrong.

You can get over 3% on Vanguard CDs. They are FDIC insured. Your stable value fund isn't.

 

[pb4uski]

To me, a good stable value fund would be the only reason to leave 401k/403b/457b monies with an employer rather than in an IRA that you can control in most cases. There are a few employers out there with a good selection of low ER index funds, but not many.

Live and learn. 1.89% is ok, but not a huge mistake.

I still have some monies with my former employer in a DC plan, but only because the plan offers an attractive life annuity option that I want to keep available to me.

 

[nico08]

Thanks for your insight, live and learn, I guess. I did not realize I could get 3%+ from Vanguard CDs. That's good to know.

 

[pb4uski]

...There have been a few rare cases where the "stable value" wasn't realized. ....

Name one or two.

 

[gauss]

The advantages of switching to an IRA after leaving an employer are often over hyped. Not surprising in that the IRA companies are private businesses and no fiduciary rules ("must do what is in the best interest of the investor") apply.

Stable value funds, age 55 wd rule, the lack of loan provisions and the extra responsibilities that you assume as IRA owner (ie IRS form 8606, RMD responsibility, taxable portion calculations etc) come to mind.

There was a Federal GAO report that touched on this that I read not too long ago. [-]I can find and provide the link if anyone is interested.[/-] Here is the link.

What you did was not necessarily stupid, but rather you followed the prevailing message that is sent to society via the marketing budgets.

-gauss

 

[utrecht]

You can withdraw funds from a 457 at any age after terminating employment. If you move that money to an IRA at Vanguard or anywhere else, you are now subject to the IRS guidelines for IRAs which means restrictions before age 59 1/2. That's a very good reason to leave your money with your employers 457 plan, unless of course you are already over 59 1/2.

 

[Htown Harry]

Generally, only programs like 401k retirement funds offer stable value funds.....looks like that is true of 457b as well. You cannot access stable market funds otherwise.

I agree with this statement if applied to tax-deferred retirement accounts, but a literal reading of the last sentence isn't quite correct. There are several 529 education savings plans with stable value funds available. I found an article that suggests these states: Colorado, Virginia, West Virginia, Rhode Island and Illinois.

I'm familiar with the Colorado fund. It's a good option for those with kids approaching enrollment or already in school, as risking loss of principal isn't desirable for an investment with a short duration before liquidation. So far as i know, it has no required holding periods.

I transitioned my 529 contributions away from an aggressive target fund to stable value fund when DD#2 was a high school junior. She's now a freshman. I'll be rolling the accumulated target date funds over to the SV fund soon.
Colorado Stable Value Plus 529 Plan: 3.09% Return Guaranteed In 2015

OP, don't beat yourself up over the switch you made. If you look across the full spectrum of your asset allocation and the variety of investment opportunities in all of your account types, I think you'll find there's a way to reach your goals.

 

[2B]

Name one or two.

I should have expected this from you. This is an old memory that some stable value funds backed by a Canadian insurer had problems about 20 years ago. People got paid at about 90 cents on the dollar. I said rare but they aren't FDIC insured.

 

[DatumPoint5]

I should have expected this from you. This is an old memory that some stable value funds backed by a Canadian insurer had problems about 20 years ago. People got paid at about 90 cents on the dollar. I said rare but they aren't FDIC insured.

In addition to the Canadian insurers who lost money in their Stable Value Funds many years ago, another example would be the very recent bankruptcy of Lehman Brothers on 9/15/2008. The Stable Value employee's fund lost 1.7 percent because the portfolio's insurance stipulated that it would not pay in a bankruptcy.

"Guaranteed Funds" and "Stable Value Funds" are never what they appear to be. They "sound good"..... But reality usually intercedes with the fantasy when the $h1T hits the fan!?!?

A reference link can be found here Savers Flooding Stable Value Funds May Have Limited Access - Bloomberg

 

[heeyy_joe]

Stupid? Nope.

 

[pb4uski]

Without reading the prospectus, I don't know for sure what your "stable value" fund is in your 457b. Many of these are actually insurance contracts (technically annuities) backed by an insurance company. Typically, they are also "guaranteed" by a state's insurance pool which shouldn't be confused to be backing by the actual state. It's the other insurance companies that do business in that state with the same product. There have been a few rare cases where the "stable value" wasn't realized. I don't believe it has happened recently but I could be wrong......

Name one or two.

I should have expected this from you. This is an old memory that some stable value funds backed by a Canadian insurer had problems about 20 years ago. People got paid at about 90 cents on the dollar. I said rare but they aren't FDIC insured.

In addition to the Canadian insurers who lost money in their Stable Value Funds many years ago, another example would be the very recent bankruptcy of Lehman Brothers on 9/15/2008. The Stable Value employee's fund lost 1.7 percent because the portfolio's insurance stipulated that it would not pay in a bankruptcy.

"Guaranteed Funds" and "Stable Value Funds" are never what they appear to be. They "sound good"..... But reality usually intercedes with the fantasy when the $h1T hits the fan!?!?

A reference link can be found here Savers Flooding Stable Value Funds May Have Limited Access - Bloomberg

Interesting link. There is a nuance of a difference here that was my point to 2B's post. My reading of the link is that in the cases where there have been losses to participants were due to contractual provisions in the insurance contract and not that the insurers were unable to meet their obligations which was implied by the reference to state guaranty funds. If that reading is correct, then the state guaranty funds would never have come into play because they only relate to insurers in receivership.

 

[NW-Bound]

This talk of Stable Value Fund reminds me of the fiasco with Executive Life Insurance in the early 90s, with whom Unisys invested. My former megacorp was bought out and traded a couple of times, and my 401k ended up with Unisys. I did not have that much in that fund (a few $K?), hence did not remember the outcome other than I recovered some money and did not lose it all. Just now, found out that several other corps also lost money with Executive Life, and not just Unisys.

And in searching the Web, found out that more recently when AIG went belly up Uncle Sam had to come to the rescue. Excerpt from Wikipedia follows:

In the late 2000s, insurance company AIG was bailed out by the federal government to the tune of over a hundred billion dollars. Much of the government money (at least 9 billion dollars) was used to pay out on "Guaranteed Investment Agreement" contracts that AIG had sold to investors.​

 

[Niuatoputapu]

nico08 - Stupid? no. Hindsight has its advantages, but 1.89% on stable value fund versus what you can earn elsewhere is small potatoes.

A comment to the larger group about 457(b) plans - there are two major variations out there, specifically governmental and non-governmental plans. I'm sure nico08 knows what he has. But some of the comments assume governmental 457(b) plans. The non-governmental plans are usually (always?) offered by nonprofit organizations. These non-governmental plans are subject to the claims of the nonprofit's creditors. Just like the deferred compensation plans at Lehman Brothers and Bear Stearns, nongovernmental 457(b)s can disappear before participants can access the funds.

 

[papadad111]

In addition to the Canadian insurers who lost money in their Stable Value Funds many years ago, another example would be the very recent bankruptcy of Lehman Brothers on 9/15/2008. http://www.bloomberg.com/news/2011-...ds-that-beat-market-limit-access-to-cash.html

I think the first and oldest money market fund in the industry, The Primary Reserve fund, broke a buck in September 2008 and has never returned 100% of the investment to me. That's probably the biggest stable value fund (not FDIC insured) to "fail"

 

[2B]

I think the first and oldest money market fund in the industry, The Primary Reserve fund, broke a buck in September 2008 and has never returned 100% of the investment to me. That's probably the biggest stable value fund (not FDIC insured) to "fail"

There are many differences between money market funds and stable value funds. Breaking the buck was a major issue in 2008 when FDIC insurance was temporarily expanded to money market funds. There were massive cash outflows from people not wanting to be in them as the contagian spread from Lehman.

 

[LOL!]

Thanks for your insight, live and learn, I guess. I did not realize I could get 3%+ from Vanguard CDs. That's good to know.

Don't get axcited by 3+% CDs since they all are pretty much all 10-year or more. Every once in a while a 7- or 8-year maturity will show up.

Vanguard does have very nice bond funds though that have yields of 2% to 3%.

Don't get caught up in stable value funds if one moved the money to do investing and not just saving. Perhaps the rationale for seeking stabl value is not all that.

 

[pb4uski]

I think the first and oldest money market fund in the industry, The Primary Reserve fund, broke a buck in September 2008 and has never returned 100% of the investment to me. That's probably the biggest stable value fund (not FDIC insured) to "fail"

Reserve Primary Fund was a money market fund, not a stable value fund, but you are correct that it broke the buck and was not FDIC insured, like all money market funds. It held a lot of Lehman Bros commercial paper. According to reports, investors lost a couple percent.

 

[Cobra9777]

I rolled my 401K into an IRA immediately upon retirement. Main reason was to gain access to the whole universe of low-ER index ETFs and to eliminate account maintenance fees, which were immaterial but irritating. In retrospect, I sometimes wish I had left some money in the 401K just to have access to the SV fund. At the time, I was not invested in SV and it was nowhere on my radar, so i didn't give it a second thought. However, it's now very much on my radar, as a possible safe haven when/if interest rates start rising.

DW is still working OMY and has access to a SV fund via her 457B, so all is not lost. But compared to the one I left behind, it's a terrible fund so I've been avoiding it like the plague. Also, her balance is less than half our total fixed income allocation, so it's only a partial solution at best.

"Stupid"?... no. The reasons to roll are still quite compelling IMO. And the jury is still out as to whether I will ever need SV. In "normal" times, it would never be a consideration. My conventional bond index funds had impressive returns in 2014, and so long as the masses think a blood bath is imminent, I suspect there's an equal probability of the opposite. Worst case, I'll dip my toes into less familiar waters, like CDs and target maturity bond funds.

 

[RetireAge50]

I think you did a wise move not a stupid one. Like you said you will pay lower expenses now. You might consider Wellesley for your more conservative money. It will likely provide you much better returns and still be quite stable.

 

[jags86]

Sorry to highjack the thread but I had a question about stable value funds.

My 401k offers a stable value fund with a 3% fixed rate of return. Would this be a suitable alternative to holding bonds considering interest rates are so low?

 

[2B]

Sorry to highjack the thread but I had a question about stable value funds.

My 401k offers a stable value fund with a 3% fixed rate of return. Would this be a suitable alternative to holding bonds considering interest rates are so low?

Read the whole thread. Stable value funds are pretty well discussed.

My suggestion is to look very carefully how the "stable" value fund is guaranteed and what the credit rating is for them. These are not FDIC insured and are typically not diversified. The "guarantor" is usually an insurance company. Find out if you have any limitations to move money in or out of the fund.

 

[pb4uski]

Sorry to highjack the thread but I had a question about stable value funds.

My 401k offers a stable value fund with a 3% fixed rate of return. Would this be a suitable alternative to holding bonds considering interest rates are so low?

Generally, yes and many posters here are using stable value funds as all or part of their bond allocation to mitigate interest rate risk. As 2B wrote, there are a few rare cases over the last 20 years of companies that went bankrupt that the loss in principal was caused by the employer's bankruptcy and the insurer was not obligated to pay under their contract with the plan... Lehman Bros and Chrysler were named in a link earlier in this thread, but in those cases the loss to the participants were relatively small (1-3% IIRC), so there is a small amount of credit risk.