What's an acceptable stable value fund rate?

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northstar22
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What's an acceptable stable value fund rate?

Post by northstar22 » Mon Aug 11, 2014 4:53 pm

My mom has a pretty good 403(b) with fidelity spartan options for equities. My question relates to the bond portion. One of her options is a stable value fund (prudential principal preservation separate account) with a 1.6% return. It lists expenses of .25%, which I assume is already factored into that return (maybe a false assumption). Another is vanguard total bond market institutional, SEC yield about 2.1%.

Assuming that she understands the risks of a stable value fund and is OK with them, at what point is the yield too low to make it worthwhile to protect the principal? If it matters, retirement is about 5 years away.

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Peter Foley
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Re: What's an acceptable stable value fund rate?

Post by Peter Foley » Mon Aug 11, 2014 5:48 pm

My personal opinion is that a stable value is not worth it if you are losing buying power. The 1.6% return is a guaranteed loss when we have been seeing inflation in the 2% range. I feel very fortunate to have sable value that ranges from 3.5 to 4.5 (depending on when the funds were deposited). Were it to drop below 2.5% I'd consider moving the money. If it dropped below 2% I be gone as fast as they would let me bail out.

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Re: What's an acceptable stable value fund rate?

Post by carolinaman » Mon Aug 11, 2014 5:50 pm

My SV rate is currently 1.76 after expenses. It has trended downward for years but seems to be leveling off. I took half my SV funds out last year and put in Penfed CDs at 3%. I will probably do something similar with rest as I see little reason to keep it in SV. I do not want to put it in bonds at current rates.

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Kevin M
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Re: What's an acceptable stable value fund rate?

Post by Kevin M » Mon Aug 11, 2014 5:58 pm

Yes, the quoted yield should be net of expenses, but the yield can change.

The 1.6% comes with no interest-rate risk and probably minimal credit risk (although you need to dig a bit to determine how much). The TBM 2.1% comes with significant interest-rate risk and some credit risk.

The 1.6% rate isn't great, but it's not horrible either. Since I don't like to take much term risk, I probably would use the SV fund in preference to TBM, and bump up my stock allocation if I wanted higher expected return/risk. I suspect most Bogleheads would just stick with TBM though.

Kevin
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tibbitts
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Re: What's an acceptable stable value fund rate?

Post by tibbitts » Mon Aug 11, 2014 6:04 pm

Peter Foley wrote:My personal opinion is that a stable value is not worth it if you are losing buying power. The 1.6% return is a guaranteed loss when we have been seeing inflation in the 2% range. I feel very fortunate to have sable value that ranges from 3.5 to 4.5 (depending on when the funds were deposited). Were it to drop below 2.5% I'd consider moving the money. If it dropped below 2% I be gone as fast as they would let me bail out.
Although it's discouraging to see the low rates we have today (mine is 1.95%), and at that rate you're losing to inflation, it's very accepted here to be invested in short-term investment grade at 1.4% (with substantial risk of capital loss), or in 0.8% bank savings accounts. So while in "normal" times it would seem counter-intuitive to invest in something that's almost certain to lose vs. inflation, it might be that the best we can hope for from "safe" investments in the coming years, or even decades, will be losing relatively little to inflation.

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Re: What's an acceptable stable value fund rate?

Post by Longdog » Mon Aug 11, 2014 7:29 pm

johnep wrote:My SV rate is currently 1.76 after expenses. It has trended downward for years but seems to be leveling off. I took half my SV funds out last year and put in Penfed CDs at 3%. I will probably do something similar with rest as I see little reason to keep it in SV. I do not want to put it in bonds at current rates.
It is my understanding that a Stable Value fund is only available in 401k, 403b, or similar plans, but not in the retail market, and thus not for IRAs. I am curious how you could take half of your SV funds from such an investment, and put them in CDs at another institution. What were the logistics of that? Did you rollover to an IRA first?
Steve

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Re: What's an acceptable stable value fund rate?

Post by john94549 » Mon Aug 11, 2014 8:38 pm

Stable value funds, such as they are available, must be compared with other alternatives. For many, a stable value fund is as good as it gets (in terms of short-term, liquid, funds) when allocating in a 401K or equal. Many 401Ks (etc.) don't exactly give you the option of farming out your "cash" to CDs, or garden-variety savings accounts. Even so, anything above 1% probably meets or exceeds said savings accounts. That said, stable value funds have risk, unlike those FDIC or NCUA-insured savings accounts.

The thornier issue is what to do with funds allocated to "stable value funds" should they become (a) unavailable, or (b) un-competitive. My wife faced choice (a) and went with Vanguard's Total Bond Fund in her 401K. Not perfect, but better than a poke in the eye. If facing choice (b), you either have to explore bond fund alternatives or moving part of a 401K to an IRA, then buying a CD ladder (or similar). It gets complicated.

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Re: What's an acceptable stable value fund rate?

Post by Johm221122 » Mon Aug 11, 2014 9:18 pm

A big factor is the exspence ratio of the vanguard bond index :?: the higher the exspence ratio the more likely I would choose the stable value fund

John

northstar22
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Re: What's an acceptable stable value fund rate?

Post by northstar22 » Tue Aug 12, 2014 12:57 am

Thanks everyone. As I sort of expected its a pretty close call. She's in TBM at the moment (.07 ER), so inertia may win out. But I'll keep an eye on the SV rate, as I do like the lack of interest rate risk. I suppose a compromise could be to diversify between the 2.

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Re: What's an acceptable stable value fund rate?

Post by carolinaman » Tue Aug 12, 2014 6:30 am

SteveM wrote:
johnep wrote:My SV rate is currently 1.76 after expenses. It has trended downward for years but seems to be leveling off. I took half my SV funds out last year and put in Penfed CDs at 3%. I will probably do something similar with rest as I see little reason to keep it in SV. I do not want to put it in bonds at current rates.
It is my understanding that a Stable Value fund is only available in 401k, 403b, or similar plans, but not in the retail market, and thus not for IRAs. I am curious how you could take half of your SV funds from such an investment, and put them in CDs at another institution. What were the logistics of that? Did you rollover to an IRA first?
Yes, I did rollover of part of 401k funds into an IRA. I am retired so this is not a problem. Actually, our 401k allows partial rollover even while you are still working which I believe is a little unusual.

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Re: What's an acceptable stable value fund rate?

Post by dickenjb » Tue Aug 12, 2014 7:24 am

If TBM is yielding 2.1% and SVF 1.6% I would go with TBM.

When my SVF was yielding 2.2% and TBM was 1.6% I was 100% SVF. In fact, I alone held 0.5% of my company's entire SVF balance (20,000 employees).

Now I am 100% TBM in my 401(k), equities held at Vanguard.

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Re: What's an acceptable stable value fund rate?

Post by tibbitts » Tue Aug 12, 2014 7:56 am

Kevin M wrote:Yes, the quoted yield should be net of expenses, but the yield can change.

The 1.6% comes with no interest-rate risk and probably minimal credit risk (although you need to dig a bit to determine how much). The TBM 2.1% comes with significant interest-rate risk and some credit risk.

The 1.6% rate isn't great, but it's not horrible either. Since I don't like to take much term risk, I probably would use the SV fund in preference to TBM, and bump up my stock allocation if I wanted higher expected return/risk. I suspect most Bogleheads would just stick with TBM though.

Kevin
I'm thinking that would be too small a difference for most bogleheads to fall back to TBM, partly because of rebalancing. If you get significantly higher interest rates in the future, you may see a drop in bonds and stocks simultaneously (if not to the same degree), making rebalancing from SV more effective than from TBM. Possibly some people in this thread are thinking of (traditional, retirement-classes of) TIAA and its withdrawal restrictions as SV, which it isn't, strictly. Most SV funds have only moderate restrictions on moving money in and out. We've gone through some recent economic history where at least the highest quality bonds have generally held up or risen when equities have dropped, but that may not always be the case, depending on the reason for the drop in equities. At least at .6% difference, I'm guessing a majority of bogleheads would at least split a balance between SV and TBM, if not have more in SV.

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Re: What's an acceptable stable value fund rate?

Post by sschullo » Tue Aug 12, 2014 7:57 am

Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: What's an acceptable stable value fund rate?

Post by dbr » Tue Aug 12, 2014 8:06 am

SV funds will have rates in line with prevailing interest rates except that the rates paid will tend to lag the bond market in timing. What should have happened is that SV rates are now lower following interest rate declines over the last couple of years, and if rates go back up SV rates will eventually follow. I am not sure there is a concept of what is "acceptable." In general one will get about intermediate bond rates less some costs plus the benefit of contractual guarantees that there will not be fluctuations in value.

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Aptenodytes
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Re: What's an acceptable stable value fund rate?

Post by Aptenodytes » Tue Aug 12, 2014 9:02 am

I would caution against comparing the yields of a stable value fund to the yield of Total Bond. Before the yields are really comparable, you need to adjust for the risk in TBM, as Kevin M suggests. Perhaps there are mathematical formulas for assigning percentages to stable value and bonds, given conditions in the markets, but I've never come across them. I think this is largely intuitive, based on your risk profile, the value you place on stability, and other hard-to-quantify things.

Don't put too much emphasis in the negative real yield in the stable value fund. Numbers are numbers, even to the left of 0. There's no swamp of monsters in the area left of zero. Stability comes with a price, and if it is important enough to you you pay the price. It would be irrational to freak out over a negative real yield. If you were putting 100% of your holdings in a stable value fund that was going to have negative real yields forever, that's problematic; but a portion for a while, that's quite different.

For what it's worth, I have my fixed-income roughly 20% TIPS, 35% stable value, and 45% intermediate-term Treasuries. I couldn't write a formula that yields that allocation; it just feels right. I have access to TIAA Traditional at attractive rates (I think most of my holdings are currently paying 3%). If I didn't have access to TIAA Traditional, I would probably be capping my SV at more like 20% or just dumping them altogether and relying on TIPS for stability + inflation protection.

northstar22
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Re: What's an acceptable stable value fund rate?

Post by northstar22 » Tue Aug 12, 2014 9:39 am

dbr wrote:SV funds will have rates in line with prevailing interest rates except that the rates paid will tend to lag the bond market in timing. What should have happened is that SV rates are now lower following interest rate declines over the last couple of years, and if rates go back up SV rates will eventually follow. I am not sure there is a concept of what is "acceptable." In general one will get about intermediate bond rates less some costs plus the benefit of contractual guarantees that there will not be fluctuations in value.
Maybe "competitive" would be a better word choice.
Aptenodytes wrote:I would caution against comparing the yields of a stable value fund to the yield of Total Bond. Before the yields are really comparable, you need to adjust for the risk in TBM, as Kevin M suggests. Perhaps there are mathematical formulas for assigning percentages to stable value and bonds, given conditions in the markets, but I've never come across them. I think this is largely intuitive, based on your risk profile, the value you place on stability, and other hard-to-quantify things.
This is the crux of the issue, trying to compare yields on different products which as you point out are quite different funds. At some point the SV becomes uncompetitive despite its advantages in stability (eg if it was offering 0.5%). But as often happens, it seems the decision is pretty close.

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Re: What's an acceptable stable value fund rate?

Post by Tigermoose » Tue Aug 12, 2014 9:54 am

Aptenodytes wrote: For what it's worth, I have my fixed-income roughly 20% TIPS, 35% stable value, and 45% intermediate-term Treasuries.
Why do you bother with the intermediate term treasuries? Why not just go with TIPS and SVF? I'm sure your SVF has a higher yield than the IT treasuries, and there is no interest rate risk.
Institutions matter

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Aptenodytes
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Re: What's an acceptable stable value fund rate?

Post by Aptenodytes » Tue Aug 12, 2014 11:59 am

Tigermoose wrote:
Aptenodytes wrote: For what it's worth, I have my fixed-income roughly 20% TIPS, 35% stable value, and 45% intermediate-term Treasuries.
Why do you bother with the intermediate term treasuries? Why not just go with TIPS and SVF? I'm sure your SVF has a higher yield than the IT treasuries, and there is no interest rate risk.
1) I can't rebalance with TIPS or SVF.
2) In the long-term, Treasuries and SVF aren't that far off. The SVF is so illiquid that I can't be swimming between the two shores.

Is it possible that in spite of the above I am too low in SVF? I ask myself the same question sometimes. It would take some engineering to increase the SVF % but it could be done. I last took a first-principles look about a year ago. maybe it is time for another.

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Re: What's an acceptable stable value fund rate?

Post by Tigermoose » Tue Aug 12, 2014 2:16 pm

Aptenodytes wrote:
Tigermoose wrote:
Aptenodytes wrote: For what it's worth, I have my fixed-income roughly 20% TIPS, 35% stable value, and 45% intermediate-term Treasuries.
Why do you bother with the intermediate term treasuries? Why not just go with TIPS and SVF? I'm sure your SVF has a higher yield than the IT treasuries, and there is no interest rate risk.
1) I can't rebalance with TIPS or SVF.
2) In the long-term, Treasuries and SVF aren't that far off. The SVF is so illiquid that I can't be swimming between the two shores.

Is it possible that in spite of the above I am too low in SVF? I ask myself the same question sometimes. It would take some engineering to increase the SVF % but it could be done. I last took a first-principles look about a year ago. maybe it is time for another.
I understand your need for liquidity. My plan is to have a majority in SVF until the yield on Intermediate Treasuries exceeds that of theSVF. Then I would go more to IT Treasury.
Institutions matter

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