Bad bond options in 403B

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
tavi1
Posts: 6
Joined: Fri Dec 22, 2017 4:32 pm

Bad bond options in 403B

Post by tavi1 » Fri Dec 22, 2017 4:53 pm

Dear Bogleheads,

I've been off of the forum for some time, following appropriate indexing and rebalancing each year. It's amazing how little time it all takes once you learn the basic rules.

However, I was surprised this year to see that my wife's 403 B which used to be in Fidelity was moved to Transamerica Retirement. Unfortunately, there are only 3 bond options in this 403 B

1: Gugenheim total return bond: GIBLX; Gross ER 0.96%; Net ER 0.75%. This seems high for a bond fund. From the prospectus, it seems that it can invest in just about any type of bond, including emerging markets, though the prospectus says it invests 'principally' in developed markets. Here's the prospectus statement:

Investment Strategy:
The investment seeks to provide total return,
comprised of current income and capital
appreciation. The fund invests at least 80% of its
assets (net assets, plus the amount of any
borrowings for investment purposes) in debt
securities. While the fund will principally invest
in debt securities listed, traded or dealt in
developed markets countries, it may also invest
without limitation in securities listed, traded or
dealt in other countries, including emerging
markets countries.


2: Pimco income: PIMIX; Gross ER 0.48%; Net ER 0.45%; a multi sector bond fund. A reasonable ER, but the prospectus makes it look quite risky: here's the prospectus statement:

Investment Strategy:
The investment seeks to maximize current
income; long-term capital appreciation is a
secondary objective. The fund invests at least
65% of its total assets in a multi-sector portfolio
of Fixed Income Instruments of varying
maturities, which may be represented by
forwards or derivatives such as options, futures
contracts or swap agreements. It may invest up
to 50% of its total assets in high yield securities
rated below investment grade but rated at least
Caa by Moody's, or equivalently rated by S&P
or Fitch, or if unrated, determined by PIMCO to
be of comparable quality.

3: Prudential guaranteed income fund: no ER given; prospectus statement:

Investment Style:
Stable Value
Investment Objective:
The Prudential Guaranteed Income Fund is
designed to provide safety of principal,
liquidity and a competitive rate of return.
Investment Strategy:
The Fund invests in a broadly diversified,
fixed-income portfolio within PRIAC’s
general account. The portfolio is primarily
invested in public bonds, commercial
mortgages and private placement bonds.
Issuer:
The Prudential Retirement Insurance and
Annuity Company
Advisor:
Prudential Investment Management, Inc.
Inception Date:
1/1/1981


I am totally confused why these would be the only options in a retirement fund! We tried emailing the person in charge but they just said that they needed to the first 2 funds in order to generate returns in a low interest rate environment and that if we didn't like it then we should just put it in the stable value. Of course if you are getting good returns (as the first 2 funds are) in a low interest rate environment, you are either very lucky or risky. Maybe I should just do the stable value. I just hate that it is so opaque and there is no way for me to know the expenses or returns.

The 403 B does have an excellent US stock fund (Fidelity total market index with 0.04 % ER) but that means selling my US stock fund in my taxable account, taking a lot of long term capital gains, and it means buying a bond fund in my taxable.

Given all of this, my best guess as a Boglehead is that I should just take the stable value fund or speak with a boglehead-friendly financial advisor.

Thanks so much for your help and sorry for the post.

Tavi1
Last edited by tavi1 on Sat Dec 23, 2017 3:31 am, edited 1 time in total.

venkman
Posts: 698
Joined: Tue Mar 14, 2017 10:33 pm

Re: Bad bond options in 403B

Post by venkman » Fri Dec 22, 2017 10:05 pm

What's the current yield on the stable value fund? I've noticed a lot of times when SV funds are discussed here, they're generally competitive with Total Bond funds.

Instead of using the sub-par bonds in the 403b, could you open an IRA and use that for your bond allocation?

tavi1
Posts: 6
Joined: Fri Dec 22, 2017 4:32 pm

Re: Bad bond options in 403B

Post by tavi1 » Fri Dec 22, 2017 10:54 pm

Thanks kindly for your reply. I don’t see the expenses or yield of the SV fund listed in the summary but I will try to locate the complete prospectus.

Right now I have a Roth IRA that I manage separately with ‘age in bonds’ stock/ bond allocation. I could consider making it all bonds and buying the stock fund in the 403b. I like managing my Roth as a separate porflio with a mix of stocks and bonds like my overall portfolio due to potential for greater returns but maybe this logic is flawed.

I love this forum— thanks again for both of the great ideas!

Tavi1

lack_ey
Posts: 6613
Joined: Wed Nov 19, 2014 11:55 pm

Re: Bad bond options in 403B

Post by lack_ey » Sat Dec 23, 2017 12:07 am

Hm, the second fund seems to be PIMCO Income. It's a multisector category fund. The name is not PIMCO Multisector.

Whoever runs the plan seems to have just chosen two funds based on past performance. PIMCO Income is rather huge at over $100 billion assets after doing really well since inception just over 10 years ago, with pretty tame volatility to go with what has turned out to be some great returns, in part from riding the non-agency and commercial MBS out of the financial crisis. I'm not the hugest fan but I wouldn't have a lot against it. It's taking a number of risks and being fairly active, but it's not reckless in terms of bets and exposures. Surely there's some downside greater than has been realized so far, but it's not unreasonable, I don't think. I just wouldn't count on continued outperformance near the magnitude seen since inception.

One thing you need to understand about stated investment strategies and percentages given is that funds frequently are written broader than they typically tend to invest. Also, there's nothing that much inherently risky in derivatives; it depends more on what is used specifically and how.

I'd also say to check carefully the rate given by the stable value fund.

CFM300
Posts: 1373
Joined: Sat Oct 27, 2007 5:13 am

Re: Bad bond options in 403B

Post by CFM300 » Sat Dec 23, 2017 1:05 am

tavi1 wrote:
Fri Dec 22, 2017 4:53 pm
The 403 B does have an excellent US stock fund (Fidelity total market index with 0.04 % ER)
...
I could consider making [my Roth IRA] all bonds and buying the stock fund in the 403b.
That is what I would do, although it may not work as a long-term strategy depending on how much your wife will be contributing to her 403(b) each year.

tavi1
Posts: 6
Joined: Fri Dec 22, 2017 4:32 pm

Re: Bad bond options in 403B

Post by tavi1 » Sat Dec 23, 2017 7:01 am

Thanks to the above posters for the advice. I have tried searching the web for the prospectus on the SV fund. Even the Prudential (now PGIM) website does not contain information about this product. All I can figure out is that it is a group annuity fund but nothing about returns or expenses. Very opaque and frustrating. Perhaps I’ll have to contact the manager of the retirement plan. Also thanks for the advice about the Pimco income fund prospectus. I’ll leave my money in there until I figure out the SV fund thanks again.

retiredjg
Posts: 33873
Joined: Thu Jan 10, 2008 12:56 pm

Re: Bad bond options in 403B

Post by retiredjg » Sat Dec 23, 2017 7:21 am

Stable value funds are always a black box, but if they pay reasonably well, they can be a good choice when your choices are limited. The reason you can't find any information is that what it pays changes every year. You have to find out what it is doing currently. Note that the ER is pretty irrelevant - it is already subtracted.

In a case like this the PIMCO Income fund will be a money maker but will probably not offer great stability in a crash. The stable value fund may not be a money maker, but they are pretty stable. I might use then both - half and half - since you have no better choices.

User avatar
CyclingDuo
Posts: 1729
Joined: Fri Jan 06, 2017 9:07 am

Re: Bad bond options in 403B

Post by CyclingDuo » Sat Dec 23, 2017 7:29 am

tavi1 wrote:
Fri Dec 22, 2017 4:53 pm
However, I was surprised this year to see that my wife's 403 B which used to be in Fidelity was moved to Transamerica Retirement. Unfortunately, there are only 3 bond options in this 403 B
Simple. Just keep the bond portion of your household portfolio in your tax advantaged accounts instead of your wife's since you don't like the three options in her 403b.

That's assuming you have better choices in your tax advantaged accounts. Do you?
"Everywhere is within walking distance if you have the time." ~ Steven Wright

tavi1
Posts: 6
Joined: Fri Dec 22, 2017 4:32 pm

Re: Bad bond options in 403B

Post by tavi1 » Sat Dec 23, 2017 7:51 am

I can sell stock funds in my/my wife’s Roths and buy bonds there. I think that’s the best option. I have a 401k through my work, but it’s run by a money manager who takes 1%. I tried to get them to put my money in index funds but they said that under Obama era regulations they have fiduciary duty to manage my money as they feel is in my best interest. The money is in a number of different institutional class aggressive managed funds. But the Roth’s are still open to rebalancing.

Thanks again
tavi1

retiredjg
Posts: 33873
Joined: Thu Jan 10, 2008 12:56 pm

Re: Bad bond options in 403B

Post by retiredjg » Sat Dec 23, 2017 8:14 am

tavi1 wrote:
Sat Dec 23, 2017 7:51 am
I tried to get them to put my money in index funds but they said that under Obama era regulations they have fiduciary duty to manage my money as they feel is in my best interest.
Well, that is a new twist (meaning a twisted way to interpret and implement the fiduciary rules)....

Paying an AUM inside a 401k is uncommon, but we have seen it a few times if I recall correctly. There is also something tugging at my memory about this type of setup being voluntary in some plans. Have you actually checked your plan documents to see if this is required?

You may not be able to do anything about it, but pushing for improvements in your work plan seems like a good idea. Here's a link with information about that, in case you have not seen it yet.

https://www.bogleheads.org/wiki/How_to_ ... 01(k)_plan

tavi1
Posts: 6
Joined: Fri Dec 22, 2017 4:32 pm

Re: Bad bond options in 403B

Post by tavi1 » Sat Dec 23, 2017 8:32 am

Yes, I figured they were 'twisting' the interpretation of the fiduciary rule. And I have been fighting this for a while. I will certainly have a look at the link to the thread. I would love to have a new 401 K manager, but we are a small business and I suspect the options are limited. Also, my senior partner likes our current managers so it's hard to switch away. If there was a way to have more than 1 401K option, that would solve everything but when I checked a few years ago it wasn't really an option for a small businesses. However, I will check the thread you referenced-- maybe things have changed. Interestingly our accountant said that I could have my own independently managed 401K as long as it was also offered to our employees. I did this using a Fidelity non prototype account for a couple of years and was very happy with this. However, I started to question whether or not it would pass regulatory scrutiny and later just decided to just use the company provider. Too bad.

Thanks again

Tavi1

student
Posts: 2530
Joined: Fri Apr 03, 2015 6:58 am

Re: Bad bond options in 403B

Post by student » Sat Dec 23, 2017 8:36 am

tavi1 wrote:
Sat Dec 23, 2017 7:51 am
I can sell stock funds in my/my wife’s Roths and buy bonds there. I think that’s the best option. I have a 401k through my work, but it’s run by a money manager who takes 1%. I tried to get them to put my money in index funds but they said that under Obama era regulations they have fiduciary duty to manage my money as they feel is in my best interest. The money is in a number of different institutional class aggressive managed funds. But the Roth’s are still open to rebalancing.

Thanks again
tavi1
This is terrible. Highway robbery.

student
Posts: 2530
Joined: Fri Apr 03, 2015 6:58 am

Re: Bad bond options in 403B

Post by student » Sat Dec 23, 2017 8:37 am

Personally I like stable value fund. You need to call them and find out the interest rate.

retiredjg
Posts: 33873
Joined: Thu Jan 10, 2008 12:56 pm

Re: Bad bond options in 403B

Post by retiredjg » Sat Dec 23, 2017 8:59 am

tavi1 wrote:
Sat Dec 23, 2017 8:32 am
Yes, I figured they were 'twisting' the interpretation of the fiduciary rule. And I have been fighting this for a while. I will certainly have a look at the link to the thread. I would love to have a new 401 K manager, but we are a small business and I suspect the options are limited. Also, my senior partner likes our current managers so it's hard to switch away. If there was a way to have more than 1 401K option, that would solve everything but when I checked a few years ago it wasn't really an option for a small businesses. However, I will check the thread you referenced-- maybe things have changed. Interestingly our accountant said that I could have my own independently managed 401K as long as it was also offered to our employees. I did this using a Fidelity non prototype account for a couple of years and was very happy with this. However, I started to question whether or not it would pass regulatory scrutiny and later just decided to just use the company provider. Too bad.

Thanks again

Tavi1
A company named Employee Fiduciary has gotten consistently good reviews around here as a provider for small businesses. Your research could start there. However, if one of the honchos likes the current managers, it is likely to be an uphill battle. Good luck.

User avatar
happymob
Posts: 544
Joined: Wed Nov 18, 2009 4:09 pm

Re: Bad bond options in 403B

Post by happymob » Sat Dec 23, 2017 9:15 am

We also have terrible (well, not quite as terrible as yours, but non-indexed and near 1.0% ERs) bond options in our 403b plans, while simultaneously having great equity options (Vanguard Institutional Total Stock, Small-cap value, REIT, etc at Vanguard's cost, so sub 0.1% ER).

We just find other places for bonds. Traditional IRAs, 529 plans, even taxable (we aren't high tax bracket) and leave the 403b plan as 100% equity. If we were high tax bracket, I'd still go 100% equity in the 403b and use some munis in taxable as 1% on a non-indexed bond fund is simply ridiculous.

tavi1
Posts: 6
Joined: Fri Dec 22, 2017 4:32 pm

Re: Bad bond options in 403B

Post by tavi1 » Sat Dec 23, 2017 9:48 am

Yes, I heard of employee fiduciary several years ago. My partner was hesitant so I held off. If I could have both employee fiduciary and our current managers as employee options that would be great but I spoke to employee fiduciary and they said that we couldn’t have both options. I’ll look into it again since it’s been a few years. In terms of the bonds, I’ll look at the returns of the stable value. If it’s decent I’ll buy that. If not, then stock funds and rebalance from the Roth. Thanks for the great ideas everyone.

Post Reply