Anyone using a Stable Value Fund for their ballast?

[Tigermoose]

Anyone using a Stable Value Fund for their fixed income ballast for an overall aggressive portfolio? I need to get more fixed income into my portfolio to meet my risk tolerance, but I've been hesitating due to the high bond prices. Do you think a Stable Value Fund in my 401k with an E. R. of .36% fits the bill?

SVF history
1 Yr +3.83% 3 Yr +4.04% 5 Yr +4.16% 10 Yr +4.72%

[letsgobobby]

there are lots of threads about stable value funds, and little consensus other than to do your own due diligence, which is generally pretty difficult.

50% of my 40% fixed income is in stable value, and I feel comfortable with that.

[dickenjb]

I am a big fan of stable value fund and have kept my 401(k) with Fidelity even after retiring just so I can access the SVF.

I would not worry about the expense ratio, just the yield which should be net of the ER.

Yours looks very good to me. Ours is yielding a little south of 2% which is still attractive vs VBTLX imho.

Apparently I am in a minority as last I looked I alone accounted for nearly 1% of the SVF assets in a 20,000 employee company.

Still a nearly risk free 2% looks good to me and as you say, we all need some fixed income.

About 60% of my fixed income allocation is in SVF. Remainder in VBTLX in tax deferred, VWIUX in taxable, a little VWALX and some I bonds.

[johnep]

I have 27% of AA in SV in 401k. Current yield 2.75%. I do not know where else to go in FI to get as high a yield without taking more risk. The yield has been slowly trending downward for years. As I understand it, it uses long term insurance wrappers and as they mature, are replaced by new lower yielding ones. I am comfortable with what I have.

[scone]

I use one, but only because it's the "lesser of two weevils" choice. There's a lack of transparency issue in mine, I can't see exactly what the fund is holding. Also the insurance company could go belly up. I can't find anyone in HR who can answer detailed questions, and I can't locate a "prospectus" on the website. This makes me exceedingly uneasy, as I am a survivor of the Reserve Primary Fund disaster. (Don't ask.) I mean, what could possibly go wrong??? :snark:

[Peter Foley]

Both my wife and I have stable value funds available in our deferred accounts. The non equities portion of those accounts are about 50% stable value, 25% total bond and 25% TIPs. I agree that there is a lack of transparency, but in theory, there is less risk from inflation than a total bond fund. So for me it is additional diversification on the low risk side of my AA. The yield on my wife's has been in the neighborhood of 4.00% while mine has been closer to 3.00%.

[Default User BR]

I established my plan for fixed income at about 50/50 stable-value and aggregate bond fund. I have been staying with that.


Brian

[Call_Me_Op]

My fixed-income in 401K is 40% SV, 30% Total Bond, 30% TIPS.

[Wagnerjb]

I use the SV fund in our 401k plan. I am 50% TIPs and 50% regular bonds. Of the 50% regular bonds, I have almost half of that in the SV fund while the remainder is split between the Vanguard ST Treasury bond fund, the Total Bond Market fund and the Intermediate Term Muni bond fund.

Best wishes.

[rob]

I use one, but only because it's the "lesser of two weevils" choice. There's a lack of transparency issue in mine, I can't see exactly what the fund is holding. Also the insurance company could go belly up. I can't find anyone in HR who can answer detailed questions, and I can't locate a "prospectus" on the website. This makes me exceedingly uneasy....

THIS is what really bothers me about mine.... I get zip info on what is really under it and they seem to think I have two heads whenever I try to push for some info..... I expect mine is GIC's carried mostly by my own company as they are in that business - but I don't know - and the lack of transparency annoys me. I do however use it since I have no short-term bonds otherwise available in my 401K but I hold my nose every time I look at it and try to pretend they are shot term bonds - not a great strategy but it's been working.

[john94549]

Back when my wife's 401K offered the Schwab stable value option (they don't any longer), I called Schwab to find out how it "worked", since no one in HR (or the plan admin) had a clue. Turns out I was shuttled to four different folks before anyone at Schwab could forward me a "snapshot" of the fund. Which helped some, but not a lot. Opaque would be a good term.

I suspect most of these funds are proprietary (as was Schwab's).

So, she passed and took the Vanguard Signal Total Bond fund for the FI portion of her allocation.

[ResNullius]

I'm not putting down Stable Value Funds, but I simply don't understand why a person would want to be in one. You can create your own stable value portfolio by simply putting a few index funds together, all with much lower expense ratios, and you can adjust your risk tolerance to your exact needs, as opposed to the fixed choice of the stable value fund. Anyway, I just don't get it. I'm more than willing to be convinced if anyone has a good explanation.

[prudent]

Our 401k's SVF is currently paying 3% and the rate is always guaranteed for 6 months going forward, so I use that for 50% of my FI allocation.

[Call_Me_Op]

I use the SV fund in our 401k plan. I am 50% TIPs and 50% regular bonds. Of the 50% regular bonds, I have almost half of that in the SV fund while the remainder is split between the Vanguard ST Treasury bond fund, the Total Bond Market fund and the Intermediate Term Muni bond fund.

Best wishes.

Wagner,

It is very unusual to hold a muni bond fund in a 401K, because the interest is already federal tax-exempt.

[Call_Me_Op]

I'm not putting down Stable Value Funds, but I simply don't understand why a person would want to be in one. You can create your own stable value portfolio by simply putting a few index funds together, all with much lower expense ratios, and you can adjust your risk tolerance to your exact needs, as opposed to the fixed choice of the stable value fund. Anyway, I just don't get it. I'm more than willing to be convinced if anyone has a good explanation.

Not correct. A stable value fund will often guarantee a minimum rate of return. They will not drop in value. Index funds can and do drop in value.

[Johm221122]

I use it in 401 ,I do all my rebalancing in 401.It just makes it easier on me.I hold most bonds in Roth and savings bonds.The other bond fund in my 401 is Pimco with high ER
john

[ResNullius]

I'm not putting down Stable Value Funds, but I simply don't understand why a person would want to be in one. You can create your own stable value portfolio by simply putting a few index funds together, all with much lower expense ratios, and you can adjust your risk tolerance to your exact needs, as opposed to the fixed choice of the stable value fund. Anyway, I just don't get it. I'm more than willing to be convinced if anyone has a good explanation.

Not correct. A stable value fund will often guarantee a minimum rate of return.... Index funds can and do drop in value.

Wrong. Stable value funds "guarantee" a stable/minimum montly or quarterly payout by dipping into principal. The underlying funds that make up the SVF do go up and down in value, which hastens the depletion of the fund over time, just like having a mix of regular mutual funds, only the SVF charges more in fees and expenses. Again, I just don't see the sense, except for the elderly who aren't able to fend for themselves and who don't have close family who can manage their portfolio.

[Tigermoose]

Wrong. Stable value funds "guarantee" a stable/minimum montly or quarterly payout by dipping into principal. The underlying funds that make up the SVF do go up and down in value, which hastens the depletion of the fund over time, just like having a mix of regular mutual funds, only the SVF charges more in fees and expenses. Again, I just don't see the sense, except for the elderly who aren't able to fend for themselves and who don't have close family who can manage their portfolio.

I think that you must be thinking of some other kind of fund. The Wiki for Stable Value Fund says nothing about what you are referring to. Insurance companies have a contract with the fund, and they insure a certain return without any loss of your principal that you put into the fund.

[crashcallington]

Wrong. Stable value funds "guarantee" a stable/minimum montly or quarterly payout by dipping into principal. The underlying funds that make up the SVF do go up and down in value, which hastens the depletion of the fund over time, just like having a mix of regular mutual funds, only the SVF charges more in fees and expenses. Again, I just don't see the sense, except for the elderly who aren't able to fend for themselves and who don't have close family who can manage their portfolio.

Yeah that definitely is not how stable value funds work. It all depends on which type you have (http://en.wikipedia.org/wiki/Stable_val ... alue_funds) but for all of them the return is based on the performance of the underlying investments and the contracts with them are just used to ensure smooth returns instead of the volatility you get with bonds so that it is more predictable. It doesn't mention anything about "dipping into principal". SVF definitely have higher fees since they pay for insurance contracts and such, but their net yields are still fairly high as a lot of people mentioned in the thread...

[Wagnerjb]

I use the SV fund in our 401k plan. I am 50% TIPs and 50% regular bonds. Of the 50% regular bonds, I have almost half of that in the SV fund while the remainder is split between the Vanguard ST Treasury bond fund, the Total Bond Market fund and the Intermediate Term Muni bond fund.

Best wishes.

Wagner,

It is very unusual to hold a muni bond fund in a 401K, because the interest is already federal tax-exempt.

Sorry if I wasn't clear. The use of the SV fund is in my 401k. The remainder of my fixed income holdings are spread out in different accounts:

TIPs: 401K
Regular bonds - SV: 401k
Regular bonds - Total Bond Mkt fund: 529 college account
Regular bonds - Treasury Bond fund: IRA
Regular bonds - Muni bond fund: Taxable account

Hope this helps.

[Grt2bOutdoors]

In my retirement plan - I use 20% allocation to Stable Value, 60% Total Bond Market and 20% Tips. Outside of that, I-bonds, Tax-Exempt Intermediate/Limited Term, FDIC insured CD's and savings account.

529plan holds ST Investment Grade, Total Bond Market Index, CD's.

[ResNullius]

Wrong. Stable value funds "guarantee" a stable/minimum montly or quarterly payout by dipping into principal. The underlying funds that make up the SVF do go up and down in value, which hastens the depletion of the fund over time, just like having a mix of regular mutual funds, only the SVF charges more in fees and expenses. Again, I just don't see the sense, except for the elderly who aren't able to fend for themselves and who don't have close family who can manage their portfolio.

I think that you must be thinking of some other kind of fund. The Wiki for Stable Value Fund says nothing about what you are referring to. Insurance companies have a contract with the fund, and they insure a certain return without any loss of your principal that you put into the fund.

I wasn't aware of the insurance component. I still doubt I would use one, because an insurance guarantee means much higher costs, but I really don't know what I'm talking about when it comes to stable value funds.

[Default User BR]

Removed - not needed now.

[ofcmetz]

I have about half of my fixed income in a GRSA TIAA Traditional account that pays 3%. Our 529 is invested in a stable value fund as well that pays 2.4%. I'm not one to put all my eggs into one basket and I still prefer to hold the rest in Intermediate bond funds.

I find stable value funds to be an excellent fixed income choice in this low rate environment. Make sure you research your choice and and understand any redemption restrictions.

[Default User BR]

I wasn't aware of the insurance component. I still doubt I would use one, because an insurance guarantee means much higher costs, but I really don't know what I'm talking about when it comes to stable value funds.

At MyMegaCorp the return is currently 2.65% net of fees. The ER is somewhere around .3%


Brian

[telemark]

If I understand this correctly, the insurance company is betting that they can get a better return than what they've agreed to pay you. If they can't, you win. Most of the time you're not going to win, so you're giving up some return in exchange for some extra safety.

What I don't understand is why there's so much variance between the rates I see here. Is it the size of the plan? My (very small company) plan only yields 1.5% in stable value. I can do better than that with I Bonds.

[Call_Me_Op]

I'm not putting down Stable Value Funds, but I simply don't understand why a person would want to be in one. You can create your own stable value portfolio by simply putting a few index funds together, all with much lower expense ratios, and you can adjust your risk tolerance to your exact needs, as opposed to the fixed choice of the stable value fund. Anyway, I just don't get it. I'm more than willing to be convinced if anyone has a good explanation.

Not correct. A stable value fund will often guarantee a minimum rate of return.... Index funds can and do drop in value.

Wrong. Stable value funds "guarantee" a stable/minimum montly or quarterly payout by dipping into principal. The underlying funds that make up the SVF do go up and down in value, which hastens the depletion of the fund over time, just like having a mix of regular mutual funds, only the SVF charges more in fees and expenses. Again, I just don't see the sense, except for the elderly who aren't able to fend for themselves and who don't have close family who can manage their portfolio.

Sorry, that is incorrect. My SV fund through TIAA-CREF guarantees principal plus at least 3% interest. It's the best deal around, IMHO. Maybe you just have a bad SV fund.

[Default User BR]

If I understand this correctly, the insurance company is betting that they can get a better return than what they've agreed to pay you. If they can't, you win. Most of the time you're not going to win, so you're giving up some return in exchange for some extra safety.

That's a poor way of looking at it. For the most part, the insurer(s) only function to guarantee rate and principal. Most plans use synthetic GICs, which are a variety of financial assets owned by the plan. Some amount goes to the insurer to back that up, so that if the assets can't provide enough return the insurer will make up the difference. The vast majority of the investment is held by the plan in the assets they hold, similar to a normal bond fund.


Brian

[ResNullius]

I'm not putting down Stable Value Funds, but I simply don't understand why a person would want to be in one. You can create your own stable value portfolio by simply putting a few index funds together, all with much lower expense ratios, and you can adjust your risk tolerance to your exact needs, as opposed to the fixed choice of the stable value fund. Anyway, I just don't get it. I'm more than willing to be convinced if anyone has a good explanation.

Not correct. A stable value fund will often guarantee a minimum rate of return.... Index funds can and do drop in value.

Wrong. Stable value funds "guarantee" a stable/minimum montly or quarterly payout by dipping into principal. The underlying funds that make up the SVF do go up and down in value, which hastens the depletion of the fund over time, just like having a mix of regular mutual funds, only the SVF charges more in fees and expenses. Again, I just don't see the sense, except for the elderly who aren't able to fend for themselves and who don't have close family who can manage their portfolio.

Sorry, that is incorrect. My SV fund through TIAA-CREF guarantees principal plus at least 3% interest. It's the best deal around, IMHO. Maybe you just have a bad SV fund.

I don't have a SVF, and I obviously don't understand them. I've read these comments with interest, but I likely won't invest in something I don't understand or that involves an insurance company. If they work as adverstised, they sound interesting, though.

[Default User BR]

I don't have a SVF, and I obviously don't understand them. I've read these comments with interest, but I likely won't invest in something I don't understand or that involves an insurance company. If they work as adverstised, they sound interesting, though.

They involve insurers, not necessarily insurance companies. Here's the most recent pool of insurers from MyMegaCorp's fund:

Code: Select all

Wrap contract provider allocations:
Wrap Contracts:                  % of Assets
Bank of America                  16.9
ING Life Insurance & Annuity     16.0
Natixis Financial Products        8.2
Pacific Life Insurance Co.       16.2
Prudential Investment Management 19.9
Royal Bank of Canada             16.7

As noted, these companies provide the wrap contracts. They don't hold the main assets, which are variety of securities held by the plan itself. At MyMegaCorp, the members of the pool are pledged to pick up any contracts that another fails to honor.


Brian

[prudent]

Here's what's in our SVF through our 401k, principal and fixed interest @ 3% (currently) guaranteed by an insurance company.

Commercial Mortgage Loans 18%
Public Corporate Bonds 34%
Private Securities 23%
Residential & Commercial Mortgage Securities 10%
Asset Backed Securities 3 4%
Agency MBS 9%
US Treasury & Agencies 0%
Other 4 1%
Cash and Short Term 1%

Portfolio Allocation As of 09/30/2012
Guarantee Quality AA- (4th highest rating out of 21)
Average Duration 3.2

[LadyGeek]

I don't have a SVF, and I obviously don't understand them. I've read these comments with interest, but I likely won't invest in something I don't understand or that involves an insurance company. If they work as adverstised, they sound interesting, though.

Here's some background info: Stable Value Fund

They are used mainly in employer retirement plans, e.g. 401(k).

[ResNullius]

I don't have a SVF, and I obviously don't understand them. I've read these comments with interest, but I likely won't invest in something I don't understand or that involves an insurance company. If they work as adverstised, they sound interesting, though.

Here's some background info: Stable Value Fund

They are used mainly in employer retirement plans, e.g. 401(k).

Thanks for the references. Does Vanguard have SVFs for individual investors?

[stratton]

Stable Value funds can break the buck just like MMFs.

When Safe Places No Longer Feel So Safe

Yet, a fund managed for Lehman Brothers Holdings’ retirement plan fell 1.7% in December after the firm’s bankruptcy-court filing, and a fund managed for certain savings plans offered to employees of Chrysler LLC paid out only 89 cents on the dollar when it was liquidated early this year.(2009)
...
One key to assessing the health of a stable-value fund is to look at the market-to-book-value ratio. The funds must disclose this ratio in their financial reports, which they have to issue at least once per year, according to the Stable Value Investment Association. Investors should call their benefits office to get updates on this data.
...
When market value is substantially below book value, investors are dependent on the bank- and insurance-company contracts to bridge the gap, so they can make withdrawals at book value. But these contract providers are often reluctant to back funds with low market-to-book-value ratios. Stable-value managers who can’t find sufficient contracts for their funds may put more money into cash, which can drag down returns.

And stable-value contracts typically don’t cover certain employer-initiated events that can spark mass withdrawals from the fund, such as layoffs and bankruptcies. In such instances, the employer and stable-value-fund manager can often negotiate arrangements that let investors make withdrawals at book value, but that doesn’t always happen, as current and former employees of Chrysler and Lehman discovered.

Paul

[Hexdump]

Interesting. I just took a look at my wifes 401k and they offer a SVF. ( Lol, I almost typed STD)
Yield b4 fees = 2.57
Yield net of fees = 2.17
ER = .59%

I had not heard of them before so she does not have her $$$ there.
She is invested in Vanguard Target Retirement 2010 instead and I think she will stay there.

And could someone please explain what ballast is ?
I am thinking it's used to fill up space of some kind though I can't imagine doing that. It seems like it is a "throw-away" amount.

[Johm221122]

Interesting. I just took a look at my wifes 401k and they offer a SVF. ( Lol, I almost typed STD)
Yield b4 fees = 2.57
Yield net of fees = 2.17
ER = .59%

I had not heard of them before so she does not have her $$$ there.
She is invested in Vanguard Target Retirement 2010 instead and I think she will stay there.

And could someone please explain what ballast is ?
I am thinking it's used to fill up space of some kind though I can't imagine doing that. It seems like it is a "throw-away" amount.

Its for stability, bond funds will loose money if rates rise fast.It is same idea as buying CDs, some like the safety and not having see your bonds funds possibly of loosing money. 2.17% is pretty close to what your getting in total bond market
john

[foxfirev5]

I'm not putting down Stable Value Funds, but I simply don't understand why a person would want to be in one. You can create your own stable value portfolio by simply putting a few index funds together, all with much lower expense ratios, and you can adjust your risk tolerance to your exact needs, as opposed to the fixed choice of the stable value fund. Anyway, I just don't get it. I'm more than willing to be convinced if anyone has a good explanation.

Where are the low cost funds that can provide about a 2% yield ? VG ST Bond Index is currently .52% and even ST Corp is only 1.14%. Also, they would not qualify for what I would call a stable value fund, the index funds NAV fluctuates.

[dbr]

And could someone please explain what ballast is ?
I am thinking it's used to fill up space of some kind though I can't imagine doing that. It seems like it is a "throw-away" amount.

That just means the volatility of the portfolio is reduced by blending low volatility assets with high volatility assets.

The stability of a ship is increased by loading dead weight (ballast) below the center of buoyancy.

[Default User BR]

Yet, a fund managed for Lehman Brothers Holdings’ retirement plan fell 1.7% in December after the firm’s bankruptcy-court filing, and a fund managed for certain savings plans offered to employees of Chrysler LLC paid out only 89 cents on the dollar when it was liquidated early this year.(2009)

If you follow up on the details of the Lehman situation, the fund still returned about 2% for that year, even with the drop. So we're really left with the Chrysler situation. While 11% is a bit of stinger for a "safe" investment, it's nothing like a disaster. Certainly nothing like people who held company bonds. Sounds like it was a management decision to liquidate the plan that precipitated it. Other companies have gone through bankruptcy without that sort of thing. So basically we have one odd-ball case.


Brian