Stable Value Funds

[ResNullius]

Just wondering, why doesn't Vanguard have a Stable Value Fund like the ones so often mentioned in this Board. The ones discussed here all seem to be in 401K plans, as opposed to being available via IRAs. I'm not sure I even know for sure what a Stable Value Fund really is.

[stevewolfe]

Vanguard does have a Stable Value fund, it's named the 'Vanguard Retirement Savings Trust' and it's available in my 401(k) from megacorp. It's not available to IRA accounts, however.

[Sidney]

Just wondering, why doesn't Vanguard have a Stable Value Fund like the ones so often mentioned in this Board. The ones discussed here all seem to be in 401K plans, as opposed to being available via IRAs. I'm not sure I even know for sure what a Stable Value Fund really is.

http://www.bogleheads.org/wiki/Stable_Value_Fund

[ourbrooks]

Stable value funds require slow or limited withdrawal rates. Suppose a stable value fund invests in 20 year Treasuries; as long as they're pretty sure that everyone isn't going to ask for their money back at the same time, they can plan on holding the Treasuries to maturity. They don't have to keep a liquidity reserve in case there's a run on the fund. They're also allowed to quote the maturity value of the bonds, not their current market values, and to offer the interest rates of the long term investments.

For a stable value fund to be feasible, it has to be inside of some kind of vehicle which makes it likely that those conditions will be met. 401Ks and other deferred savings plans are good places; people can't just suddenly withdraw all of their money and, as long as the stable value fund is (drumroll) stable valued, they're unlikely to panic and move it all to a money market fund.

In investing theory, there's something called the "liquidity premium," the amount you'd be willing to pay for a more liquid investment over a less liquid one. Publically traded mutual funds are very liquid investments so it's not surprsing that something less liquid costs less for a given amount of returns, i.e., the less liquid investment has better returns.

I've noticed that TIAA has begun offering a stable value fund as part of some 529 plans. They pay "only" a 1% return but your balance never changes because of market conditions. TIAA can do this because people can't generally take money out of a 529 plan all at once without paying a 10% penalty.

[crashcallington]

Just a heads up, there is a much more updated stable value fund article on wikipedia that we could use on the wiki here.

http://en.wikipedia.org/wiki/Stable_value_fund

[kaneohe]

I've noticed that TIAA has begun offering a stable value fund as part of some 529 plans. They pay "only" a 1% return but your balance never changes because of market conditions. TIAA can do this because people can't generally take money out of a 529 plan all at once without paying a 10% penalty.

Thanks for explanation of why stable value is more commonly found in 401Ks than IRAs. Just going from memory so might be wrong...........isn't the penalty for withdrawing from the 529, 10% on the earnings only? If so, low earnings, low penalty?

[rkhusky]

I've noticed that TIAA has begun offering a stable value fund as part of some 529 plans. They pay "only" a 1% return but your balance never changes because of market conditions. TIAA can do this because people can't generally take money out of a 529 plan all at once without paying a 10% penalty.

The key is that most of the people can't take their money out all at the same time. People that are currently paying for college take their funds out fairly quickly. But, if you know the age of the beneficiaries, you can make good predictions on withdrawals. Because of the penalties, most of the non-education withdrawals from the SV fund would be to transfer to another state's plan or to move to other funds within the current plan.

[Wagnerjb]

I've noticed that TIAA has begun offering a stable value fund as part of some 529 plans. They pay "only" a 1% return but your balance never changes because of market conditions. TIAA can do this because people can't generally take money out of a 529 plan all at once without paying a 10% penalty.

Thanks for explanation of why stable value is more commonly found in 401Ks than IRAs. Just going from memory so might be wrong...........isn't the penalty for withdrawing from the 529, 10% on the earnings only? If so, low earnings, low penalty?

A private company can offer a stable value fund in their 401k plan because the withdrawals are also very predictable...in other words, the balances invested are fairly stable.

I am not sure if our 401k plan does this deliberately to protect the SV fund (I suspect so), but the 401k plan doesn't offer a wide range of competing short-term fixed income funds. They offer a money market fund, the SV fund, the Vanguard Total Bond Market fund and the Vanguard Long Term Treasury fund. My suspicion is that the lack of direct competition also shelters the balances in the SV fund, allowing it to achieve its objectives.

Best wishes.

[jimmyrules712]

My 401k is at Vanguard and it has a Stable Value Fund option. Stable Value funds are just never normally available outside of 401ks.