How Safe are Stable Value Funds

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LXEX55
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How Safe are Stable Value Funds

Post by LXEX55 » Sat Sep 30, 2017 3:22 pm

In the event of much publicized market correction ever occuring, will Stable Value funds in my 401k be safe?

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welderwannabe
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Re: How Safe are Stable Value Funds

Post by welderwannabe » Sat Sep 30, 2017 3:44 pm

The answer is probably. No one knows for sure, and many of stable values don't really provide details as to their investments. Chances are in a normal market correction stable value funds will be OK. I would be more concerned about them in another credit crisis, although in 2008/2009 there were very very few examples of ones having problems.

I wouldn't keep all my fixed income dollars in a stable value. Personally I limit my exposure to them to 50% of my fixed income dollars in tax deferred. Others keep all their fixed incomes eggs in that basket.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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sergeant
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Re: How Safe are Stable Value Funds

Post by sergeant » Sat Sep 30, 2017 3:50 pm

Check your fund for stability. I keep the majority of our FI assets in our stable value funds and have done so for over 30 years. No problems or issues to complain about.
Lincoln 3 EOW!

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whodidntante
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Re: How Safe are Stable Value Funds

Post by whodidntante » Sat Sep 30, 2017 3:55 pm

There is credit risk, but I've not heard of anyone losing money in a stable value fund. They are conservative investments. I have about half of my non-stock investments in one.

sport
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Re: How Safe are Stable Value Funds

Post by sport » Sat Sep 30, 2017 4:00 pm

My understanding is the most stable value funds invest in a basket of very safe investments. However, a 401k plan I had at one time had a stable value fund that was 100% unsecured debt of the insurance company that administered the plan (Metropolitan). This type of stable value fund is a lot less safe than the one that has diversified investments. So, it depends...

LXEX55
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Re: How Safe are Stable Value Funds

Post by LXEX55 » Sat Sep 30, 2017 4:16 pm

Well, let me phrase it this way, I am one year away from retirement. cannot afford to loose at this late stage of the game. My 401k is 75 percent stable value, twenty five percent domestic stock mutual fund. I seem to be the kind of personalty that would do well by buying an immdediate fixed annuity at retirement as I do not have what is called much risk tolerance. What would you guys do with the 401k?

Mitchell777
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Re: How Safe are Stable Value Funds

Post by Mitchell777 » Sat Sep 30, 2017 4:47 pm

This was a long time ago but one of my 401K stable value funds was frozen, just partially, because one of the insurers went bankrupt. We eventually got all our money back but it took a couple years and we were told the outcome was uncertain. I still have a good bit of my 401K funds in stable value but I've always found them to be a bit of a black hole even when I try to dig into the investments. My rates are now so low they are not as appealing as in the past

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sergeant
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Re: How Safe are Stable Value Funds

Post by sergeant » Sat Sep 30, 2017 4:54 pm

LXEX55 wrote:
Sat Sep 30, 2017 4:16 pm
Well, let me phrase it this way, I am one year away from retirement. cannot afford to loose at this late stage of the game. My 401k is 75 percent stable value, twenty five percent domestic stock mutual fund. I seem to be the kind of personalty that would do well by buying an immdediate fixed annuity at retirement as I do not have what is called much risk tolerance. What would you guys do with the 401k?
Who is your 401k with? Can you link the SV fund info so we can evaluate it for you?
Lincoln 3 EOW!

Valuethinker
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Re: How Safe are Stable Value Funds

Post by Valuethinker » Sat Sep 30, 2017 4:57 pm

Mitchell777 wrote:
Sat Sep 30, 2017 4:47 pm
This was a long time ago but one of my 401K stable value funds was frozen, just partially, because one of the insurers went bankrupt. We eventually got all our money back but it took a couple years and we were told the outcome was uncertain. I still have a good bit of my 401K funds in stable value but I've always found them to be a bit of a black hole even when I try to dig into the investments. My rates are now so low they are not as appealing as in the past
Do you remember which insurer? The famous one was Executive Life in California one of Michael Milliken's clients.

Mitchell777
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Re: How Safe are Stable Value Funds

Post by Mitchell777 » Sat Sep 30, 2017 5:16 pm

Valuethinker wrote:
Sat Sep 30, 2017 4:57 pm
Mitchell777 wrote:
Sat Sep 30, 2017 4:47 pm
This was a long time ago but one of my 401K stable value funds was frozen, just partially, because one of the insurers went bankrupt. We eventually got all our money back but it took a couple years and we were told the outcome was uncertain. I still have a good bit of my 401K funds in stable value but I've always found them to be a bit of a black hole even when I try to dig into the investments. My rates are now so low they are not as appealing as in the past
Do you remember which insurer? The famous one was Executive Life in California one of Michael Milliken's clients.
They were headquartered in Canada. I live and work in the USA but one of the insurers in the 401K was Canadian

Uniballer
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Re: How Safe are Stable Value Funds

Post by Uniballer » Sat Sep 30, 2017 5:19 pm

At one time I had a lot of 401k money in Prudential's Guaranteed Interest Account. It was paying around 10% when I first used it, and they "guaranteed" that it would never pay less than 3%. It was impossible to get any reasonable discussion of risks concerning this fund, and Prudential could prevent you from taking out more than 20% of your holdings in this fund in any single year, etc. AIG proved in 2008 that large insurance companies can have serious problems, so there is certainly some risk.

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whodidntante
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Re: How Safe are Stable Value Funds

Post by whodidntante » Sat Sep 30, 2017 5:25 pm

LXEX55 wrote:
Sat Sep 30, 2017 4:16 pm
Well, let me phrase it this way, I am one year away from retirement. cannot afford to loose at this late stage of the game. My 401k is 75 percent stable value, twenty five percent domestic stock mutual fund. I seem to be the kind of personalty that would do well by buying an immdediate fixed annuity at retirement as I do not have what is called much risk tolerance. What would you guys do with the 401k?
What percentage of your assets would that be? We don't know how large or small the 401k is in relation to your total assets.

If it's a large percentage, I would think about diversifying. I would be comfortable if a quarter of everything I had was in a good stable value fund, but not 75%. The risk is mostly theoretical but you actually could lose money, or temporarily lose access to the money in a corporate bankruptcy.

Annuities have similar theoretical risks -- the state guarantee might limit your benefits if the insurance company is liquidated.

Regardless, you can take your time and think about it and make the right decision for you. Don't feel compelled to change something on Monday.

Beehave
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Re: How Safe are Stable Value Funds

Post by Beehave » Sat Sep 30, 2017 5:58 pm

Around 2007 I contacted Fidelity to ask if the stable value fund they ran for my DW's company's 401k held any mortgage-based securities. I could not get a straight answer out of them. After the crash began, the next 401K report from Fidelity explained that the sub-par performance of her stable value fund had been because of their holding some of these instruments. The yield was positive, and they did not break the buck. So these fund can contain junk.

Today my concern would be with the bundled sub-par auto loans that are being sold around for high interest. I don't know if stable value funds are laced with these potential land mines, but FYI I read in Business Week that Ally Bank is one of the major lenders in this field. Odds are your stable value fund is safe, but if you are worried and have access to something like a short term US Treasury fund, that probably might be a better "sleep at night" alternative for at least some of your cash.

Best wishes, and would be glad to read any comments from others.

Valuethinker
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Re: How Safe are Stable Value Funds

Post by Valuethinker » Sun Oct 01, 2017 3:07 am

Mitchell777 wrote:
Sat Sep 30, 2017 5:16 pm
Valuethinker wrote:
Sat Sep 30, 2017 4:57 pm
Mitchell777 wrote:
Sat Sep 30, 2017 4:47 pm
This was a long time ago but one of my 401K stable value funds was frozen, just partially, because one of the insurers went bankrupt. We eventually got all our money back but it took a couple years and we were told the outcome was uncertain. I still have a good bit of my 401K funds in stable value but I've always found them to be a bit of a black hole even when I try to dig into the investments. My rates are now so low they are not as appealing as in the past
Do you remember which insurer? The famous one was Executive Life in California one of Michael Milliken's clients.
They were headquartered in Canada. I live and work in the USA but one of the insurers in the 401K was Canadian
It was probably Confederation Life.

As I recall everyone did get their money back w confed life but it took a long time.

They were playing around in derivatives markets and it got them.

Thank you for the information.

dbr
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Re: How Safe are Stable Value Funds

Post by dbr » Sun Oct 01, 2017 10:57 am

LXEX55 wrote:
Sat Sep 30, 2017 3:22 pm
In the event of much publicized market correction ever occuring, will Stable Value funds in my 401k be safe?
Stable value funds are not invested in stocks, as far as I know, so a (stock) market correction has nothing directly to do with it. Otherwise the posts above should be helpful.

btenny
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Re: How Safe are Stable Value Funds

Post by btenny » Sun Oct 01, 2017 11:58 am

Stable value funds invest in risky bonds with long terms anď then buy insurance to cover the risk. The gotcha is the insurance has terms that let them not pay. So many times the fund does not pay the agreed rate or will not let you cash out or some even lost money. See Chrysler stable value fund in 2009. See other lock up issues with them. So they are sort of like junk bonds. OK but for a small part of a portfolio.

Good luck..

Valuethinker
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Re: How Safe are Stable Value Funds

Post by Valuethinker » Sun Oct 01, 2017 12:04 pm

Beehave wrote:
Sat Sep 30, 2017 5:58 pm
Around 2007 I contacted Fidelity to ask if the stable value fund they ran for my DW's company's 401k held any mortgage-based securities. I could not get a straight answer out of them. After the crash began, the next 401K report from Fidelity explained that the sub-par performance of her stable value fund had been because of their holding some of these instruments. The yield was positive, and they did not break the buck. So these fund can contain junk.

Today my concern would be with the bundled sub-par auto loans that are being sold around for high interest. I don't know if stable value funds are laced with these potential land mines, but FYI I read in Business Week that Ally Bank is one of the major lenders in this field. Odds are your stable value fund is safe, but if you are worried and have access to something like a short term US Treasury fund, that probably might be a better "sleep at night" alternative for at least some of your cash.
There's also Commercial Mortgage Backed Securities backed by (retail) property. US malls are not in a good place.

I know Covered Bonds (MBS but with final recourse on the issuer balance sheet) have been issued by Canadian banks financing soaring Canadian consumer debt, and sold into European financial institutions-- c. 55 bn Euros worth. This is how the CDOs found their way to Europe, issued by American banks in the years up to the Credit Crash. What was that line in Michael Lewis "why were all the dumbest investors in the world based within 50 miles of Dusseldorf?" (IKB was the first financial institution to fall during the leadup to the Crash).

Maybe US SVFs have bought paper from Canadian financial institutions? ;-).

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welderwannabe
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Re: How Safe are Stable Value Funds

Post by welderwannabe » Sun Oct 01, 2017 12:20 pm

Stable Values tend to invest in longer maturity debt than money market funds. Even though money markets got regulated more strictly after the financial crisis it seems that stable values were largely left alone. Why I am not sure as there were as many SV issues in 2008/2009 as money market issues.

Regardless one of the biggest problems with SVs is a run on the fund due to mass layoffs or something similar. Since they hold longer term debt it can be a bigger issue for them than for a money market, which is regulated to keep certain percentages of extremely short term debt to handle redemptions.

Then there is the additional problem of how some of them are structured. My SV, for example, is just part of the liabilities/general obligations of the insurance company that runs it. Some of companies keep the SVs in separate accts that are therefore safe from creditors in the case the insurance company has problems. My big problem with many of them is their opacity.

In any case, like anything else, buyer beware. I again recommend limiting your exposure to them unless you are really comfortable to it. I keep 50% in SV and 50% in BND in my megacorp 401k.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

stan1
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Re: How Safe are Stable Value Funds

Post by stan1 » Sun Oct 01, 2017 12:51 pm

Stable value funds are on the endangered species list and are already extinct in most corporate 401Ks which now only have bond and money market funds. You mention a 401K but do you work for a public sector employer such as a state, school district, or municipality? Does your employer have any agreements to make the stable value fund payouts whole? Is the stable value fund offered under the terms of a union contract? All of this matters.

dbr
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Re: How Safe are Stable Value Funds

Post by dbr » Sun Oct 01, 2017 12:57 pm

stan1 wrote:
Sun Oct 01, 2017 12:51 pm
Stable value funds are on the endangered species list and are already extinct in most corporate 401Ks which now only have bond and money market funds. You mention a 401K but do you work for a public sector employer such as a state, school district, or municipality? Does your employer have any agreements to make the stable value fund payouts whole? Is the stable value fund offered under the terms of a union contract? All of this matters.
MY 401K managers deleted the SV fund because they assessed that it was too expensive. I don't know how much of that is a result of low interest rates. Over the years that fund dropped from paying 5%-6% down to less than 2%. If interest rates recover significantly SV funds may come back.

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welderwannabe
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Re: How Safe are Stable Value Funds

Post by welderwannabe » Sun Oct 01, 2017 1:47 pm

Not to be contrarian, but the exact opposite thing happened to me. About 6 months ago they dropped our short term bond fund (it was Vanguard short term investment grade) and swapped it out for a stable value.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

nervouscorps
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Re: How Safe are Stable Value Funds

Post by nervouscorps » Sun Oct 01, 2017 2:09 pm

I just went through a whole ordeal trying to find a Stable Value Fund to put in my business' 401k plan. Most of them are closed to small businesses it seems and the only ones I could find I felt comfortable with were at 2.25% yield. Barely worth it in my opinion.

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Phineas J. Whoopee
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Re: How Safe are Stable Value Funds

Post by Phineas J. Whoopee » Tue Oct 03, 2017 7:55 pm

As usual, one should not suppose higher returns are available without higher risks.

There are two main types of stable value funds: Guaranteed Investment Contracts; and Synthetic Guaranteed Investment Contracts.

Briefly, the former is a general obligation of an insurance company. As always, the guarantee is only as good as the guarantor. The latter directly holds bonds of longer than money-market maturity, thus taking term risk for higher expected return. It owns the assets, and as mentioned in prior posts buys insurance against their market values dropping. To keep the premiums down the insurers (often there are several) have the contractual right to refuse to pay if the value goes down more than some set amount. Because the fund itself owns the securities, eventually at least most of them should pay out. The risk is the fund may limit redemptions for years, to allow each individual bond to to mature.

I think stable value funds can be reasonable components of portfolios, but nobody should mistake them for FDIC or NCUA-insured savings accounts.

PJW

Valuethinker
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Re: How Safe are Stable Value Funds

Post by Valuethinker » Wed Oct 04, 2017 11:56 am

LXEX55 wrote:
Sat Sep 30, 2017 3:22 pm
In the event of much publicized market correction ever occuring, will Stable Value funds in my 401k be safe?
After reading all this, I wouldn't want to have more than say 40% of my fixed income holdings in SV funds. one third is the number that comes to mind, but certainly not more than 50%.

If we have another financial crash, they will likely turn illiquid. You could even lose money.

If things stay relatively "normal" then you should be OK.

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Earl Lemongrab
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Re: How Safe are Stable Value Funds

Post by Earl Lemongrab » Wed Oct 04, 2017 5:21 pm

Valuethinker wrote:
Wed Oct 04, 2017 11:56 am
If we have another financial crash, they will likely turn illiquid. You could even lose money.
They didn't last time. What sort of financial crash are you envisioning?
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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