Trying to understand Colorado 529 stable value fund

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Trying to understand Colorado 529 stable value fund

Postby discman017 » Fri Dec 09, 2011 1:06 pm

Colorado's CollegeInvest 529 program offers an option called the Stable Value Plus fund (http://www.collegeinvest.org/collegeinv ... plus-plan/). Annual return net of fees is around 3%, which looks pretty good. And Colorado is one of the few states that offer an unlimited tax deduction for contributions, so I can save the 4.63% state income tax rate on all contributions up to my taxable income for the year. Also, CollegeInvest offers a good range of Vanguard index funds, balanced funds, and age-based funds, so if the stable value fund were to become unattractive in the future for some reason, I could move the assets into a Vanguard fund. (There's a restriction that you can't move the money directly from the stable value to a pure bond or money market fund, but I could move to a conservative balanced fund.)

What I'm trying to understand is the risk associated with the stable value fund. Stable value funds that I've encountered in the past have been insured with GICs issued by a variety of insurers to diversify risk. As far as I can tell, that's not the case with this fund. The description of the investment says it's an unsecured general obligation of MetLife, so it seems to have the characteristics of short-term debt more than what I would think of as a stable value fund:

All contributions received by the Trust will be invested by a deposit under a Funding Agreement, dated as of January 13, 2003, between
MetLife and CollegeInvest, as administrator of the Plan and trustee for the Trust (the "Funding Agreement"). The ability of
CollegeInvest to repay the amount you contributed and interest earnings on your contribution under the Plan is contingent upon the
payment of distributions by MetLife to the Trust under the Funding Agreement. The obligation of MetLife to repay the amounts
deposited under the Funding Agreement and pay interest thereon to the Trust as described herein is an unsecured obligation of MetLife.
IN SHORT, YOU COULD LOSE MONEY (INCLUDING THE AMOUNT YOU CONTRIBUTED), OR NOT EARN ANY
RETURN ON YOUR CONTRIBUTION, IF METLIFE FAILS FOR ANY REASON TO PAY INTEREST OR REPAY
AMOUNTS DEPOSITED UNDER THE FUNDING AGREEMENT


Investment of Plan Assets
The Funding Agreement - Overview. Contributions to the Trust are being invested by deposit under the Funding Agreement.
Deposits made under the Funding Agreement become commingled with the general account of MetLife. MetLife is obligated to repay
the amounts deposited under the Funding Agreement and an investment return based on an interest rate as described below.
...
The general account of MetLife supports its obligations under the Funding Agreement. No substitution, collateralization or other
safeguards relating to the credit of MetLife will be provided under the Funding Agreement, even in the event of a downgrade of the
financial strength credit ratings of MetLife or any other indication that the ability of MetLife to pay the amounts guaranteed under the
Funding Agreement may have been impaired.


Am I reading this correctly? 3% still seems like a good rate of return, but I want to make sure I understand what I'm getting into.

Thanks!
discman017
 
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Re: Trying to understand Colorado 529 stable value fund

Postby Grt2bOutdoors » Fri Dec 09, 2011 2:23 pm

Selecting this option means you are investing your money in an unsecured obligation (think bond) of MetLife, Inc. It is not collateralized or secured, any potential credit rating downgrade would not require MetLife to post collateral to provide comfort that their obligation to the fund would be ensured. In other words, you are banking on MetLife performing well in its business operations (sell more life insurance/investments,invest profitably, etc.) to continue as a going concern. Think of it as a short-term investment grade bond fund - no assurance that the issuer will not go out of business, relatively stable NAV, reasonable rate of return.

You are reading it right - short of the acronym "FDIC", you are not guaranteed anything, your money is at risk.
"Luck is not a strategy" Asking Portfolio Questions
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Re: Trying to understand Colorado 529 stable value fund

Postby bigspender » Sat Feb 09, 2013 2:23 pm

So my question is how do you lose your money in this. Does Met Life have to go out of business for that event to happen?
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Re: Trying to understand Colorado 529 stable value fund

Postby MnD » Sat Feb 09, 2013 3:00 pm

bigspender wrote:So my question is how do you lose your money in this. Does Met Life have to go out of business for that event to happen?


It's general unsecured debt so they would have to declare bankruptcy and the bankruptcy judge would determine what (if anything) the general unsecured creditors receive.
The company might not go out of business, but it would be reorganized and on average unsecured creditors get 30 cents on the dollar owed, although that percentage varies widely depending on the specifics of the bankruptcy.
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