Take Advantage of Stable Value Fund?

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bac_minus_cab
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Take Advantage of Stable Value Fund?

Post by bac_minus_cab » Sun Jun 17, 2018 8:25 am

In my workplace retirement plan, we have two separate "pension" plans. Both are managed by vanguard, both have excellent funds available (admiral and institutional shares of almost every vanguard fund).

The first is a 401k, where our employer match goes.
The second is a 403b, where our individual contributions go.
Money cannot cross the streams.

I noticed recently that there is exactly one fund available in the 401k part that is unavailable in the 403b:

Vanguard Retirement Savings Trust II
Category Stable Value
ER 0.28%
Benefit responsive contract cost 0.18%
Fund number 0338
SEC yield 2.20%

Presently, my IPS calls for 90/10 equity to fixed income, and since my investment horizon is very long (30+ years) I'm using admiral shares of Long-Term Treasuries to satisfy my bond allocation. Is having access to a stable value fund a compelling enough option to consider revising my IPS and allocation to take advantage of it? My understanding is that not all 401k plans have a stable value fund available?

Edit: Is the ER/Contract Cost additive? So would this fund have an effective expense ratio of 0.46%?

dbr
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Re: Take Advantage of Stable Value Fund?

Post by dbr » Sun Jun 17, 2018 8:32 am

If your IPS is as specific as to need to be changed so you can invest in a stable value fund rather than Treasuries, then I would say your IPS is over-specified.

Yes, stable value funds are reasonable alternatives in 401k plans and one reason some 401k plans might be better than all available alternatives. To use the word "compelling" is over-reaching. Nothing in investing is that clear cut.

averagedude
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Re: Take Advantage of Stable Value Fund?

Post by averagedude » Sun Jun 17, 2018 8:35 am

Since you have a 30 year time horizon, i would not consider this fund choice. This fund will most likely not keep up with the inflation rate over the next 30 years. Consider yourself lucky to have such a good employer plan.

dbr
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Re: Take Advantage of Stable Value Fund?

Post by dbr » Sun Jun 17, 2018 8:42 am

averagedude wrote:
Sun Jun 17, 2018 8:35 am
Since you have a 30 year time horizon, i would not consider this fund choice. This fund will most likely not keep up with the inflation rate over the next 30 years. Consider yourself lucky to have such a good employer plan.
Do you know that to be true? SV fund yields tend to be similar to intermediate bonds but lag interest rate changes by a year or so.

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vineviz
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Re: Take Advantage of Stable Value Fund?

Post by vineviz » Sun Jun 17, 2018 9:18 am

averagedude wrote:
Sun Jun 17, 2018 8:35 am
Since you have a 30 year time horizon, i would not consider this fund choice. This fund will most likely not keep up with the inflation rate over the next 30 years. Consider yourself lucky to have such a good employer plan.
I totally agree. Stable value funds have historically been a good alternative to short term bond funds, especially for investors with a strong aversion to volatility.

For someone with a long time-horizon, long-term bond funds ( like LT Treasuries) are a superior choice

tibbitts
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Re: Take Advantage of Stable Value Fund?

Post by tibbitts » Sun Jun 17, 2018 9:29 am

bac_minus_cab wrote:
Sun Jun 17, 2018 8:25 am
In my workplace retirement plan, we have two separate "pension" plans. Both are managed by vanguard, both have excellent funds available (admiral and institutional shares of almost every vanguard fund).

The first is a 401k, where our employer match goes.
The second is a 403b, where our individual contributions go.
Money cannot cross the streams.

I noticed recently that there is exactly one fund available in the 401k part that is unavailable in the 403b:

Vanguard Retirement Savings Trust II
Category Stable Value
ER 0.28%
Benefit responsive contract cost 0.18%
Fund number 0338
SEC yield 2.20%

Presently, my IPS calls for 90/10 equity to fixed income, and since my investment horizon is very long (30+ years) I'm using admiral shares of Long-Term Treasuries to satisfy my bond allocation. Is having access to a stable value fund a compelling enough option to consider revising my IPS and allocation to take advantage of it? My understanding is that not all 401k plans have a stable value fund available?

Edit: Is the ER/Contract Cost additive? So would this fund have an effective expense ratio of 0.46%?
Generally stable value funds are not quoted with expenses, so this is a completely different animal than I'm used to. Normally the stated yield is net of everything so you just don't care about or even want to know the expense ratio. You might have a fee for your plan separate from your investment choice but that's not what's being shown here. Maybe someone else has experience with your situation which appears to be different.

retiredjg
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Re: Take Advantage of Stable Value Fund?

Post by retiredjg » Sun Jun 17, 2018 9:46 am

I've seen expense ratios quoted for many stable value funds but it does not matter much. The payout is after expenses. So if the payout is good, the expense ratio does not matter much.


About using a long term bond fund as a bond allocation. Many long term bonds do not act entirely bond like in the bad times. They act more stock like. So having a 10% allocation to long term bonds might be more like having a 5% bond allocation.

Having said that, this does not appear to be true of the Long Term Treasury fund you hold. In fact, this fund did quite well in the 2007+ unpleasantness. You have convinced me this can be a good idea. :D

If you didn't have a good low cost bond fund available in your play, I'd say use the stable value fund instead.

Yes, a plan cost will be added to fund costs (expense ratio which is baked into the fund). However, I do not know what a "Benefit responsive contract cost 0.18%" is so I don't know if it is added or not. Or if your employer pays it.

I would agree if your IPS is that specific, you may be over-specified. Your IPS should be a guideline, not an exact copy of your allocations.

dbr
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Re: Take Advantage of Stable Value Fund?

Post by dbr » Sun Jun 17, 2018 9:55 am

tibbitts wrote:
Sun Jun 17, 2018 9:29 am
Generally stable value funds are not quoted with expenses, so this is a completely different animal than I'm used to. Normally the stated yield is net of everything so you just don't care about or even want to know the expense ratio. You might have a fee for your plan separate from your investment choice but that's not what's being shown here. Maybe someone else has experience with your situation which appears to be different.
[/quote]

As in the previous reply, the payout is net of expenses. My 401k plan deleted the stable value offering with the explanation that the expenses were too high relative to the net payout. The default replacement has been an intermediate duration bond index fund. In previous years when the payout was as high as 4% that fund was a pretty good holding for fixed income.

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sometimesinvestor
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Re: Take Advantage of Stable Value Fund?

Post by sometimesinvestor » Sun Jun 17, 2018 10:14 am

[I think the comments about a long term horizon are irrelevant as no one should suggest a 30 year investment in a stable value fund. However with interest rates apparently expected to rise over the next year or two the stable income seems like a good choice now.I am uncertain when you should switch but a 2 or 3% increase in yield would seem to justify the risks of the increased yield

tibbitts
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Re: Take Advantage of Stable Value Fund?

Post by tibbitts » Sun Jun 17, 2018 10:51 am

sometimesinvestor wrote:
Sun Jun 17, 2018 10:14 am
[I think the comments about a long term horizon are irrelevant as no one should suggest a 30 year investment in a stable value fund. However with interest rates apparently expected to rise over the next year or two the stable income seems like a good choice now.I am uncertain when you should switch but a 2 or 3% increase in yield would seem to justify the risks of the increased yield
I think a lot of people do invest in stable value for 30+ years, and as with bonds there have been times when they've beaten inflation by a reasonable amount- and many times when they haven't. There is a lag both up and down but it's still difficult to time, plus some plans have constraints on movement between funds. At least in my memory you're going to be waiting a while to find a 2-3% advantage in yield for short-to-intermediate bond funds vs. stable value.

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whodidntante
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Re: Take Advantage of Stable Value Fund?

Post by whodidntante » Sun Jun 17, 2018 10:52 am

I keep all my fixed income in my 401k for tax reasons. I use a stable value fund alongside TBM to shorten my duration. I do have a short term bond fund in my 401k, but it's an expensive actively managed fund with lower credit quality.

bac_minus_cab
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Re: Take Advantage of Stable Value Fund?

Post by bac_minus_cab » Sun Jun 17, 2018 11:22 am

Thanks for the input everyone!

It sounds like this might be a useful tool to consider in the future as my investment horizon shortens and I need to bring my average duration in line with that.
retiredjg wrote:
Sun Jun 17, 2018 9:46 am
If you didn't have a good low cost bond fund available in your play, I'd say use the stable value fund instead.
I do have a number of excellent low-cost fixed-income options. We have admiral shares of: Short-Term Bond, Short-Term Inv. Grd., Short-Term Treasury, Inter-Term Bond, Inter-Term Treasury, Total Bond, Total International Bond, Long-Term Bond, Long-Term Treasury, GNMA, Ultra-Short Term, as well as Prime, Federal and Treasury MM funds available across both retirement plans. The only fund that is different between the two plans is this stable value "retirement savings trust II" that is available for employer match money but not in the individual contribution pool.
dbr wrote:
Sun Jun 17, 2018 8:32 am
If your IPS is as specific as to need to be changed so you can invest in a stable value fund rather than Treasuries, then I would say your IPS is over-specified.
retiredjg wrote:
Sun Jun 17, 2018 9:46 am
I would agree if your IPS is that specific, you may be over-specified. Your IPS should be a guideline, not an exact copy of your allocations.
It is not that specific :D
It is just "...and 10% allocation to fixed income, the majority of which should be US treasuries or comparable low-credit risk, with average duration consistent with investment time horizon". Currently, my horizon is long (30+ yrs) and my duration across all retirement accounts is ~10 yrs.

stan1
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Re: Take Advantage of Stable Value Fund?

Post by stan1 » Sun Jun 17, 2018 11:25 am

If your fixed income allocation is 10% whether you leave that in Total Bond Market or move some or all of it to a Stable Value fund for a few months or even a few years will have negligible impact during your long term investing time horizon.

I do some timing on bond duration and yield. I am happy with the 3% five year CDs I bought in 2014 but am not sure I'd by a 3% 5 year CD today. I have some money in Prime Money Market fund which is paying 1.9% right now. I don't hold any Total Bond Market right now. I don't think this has major impact on my goals and outcomes.

aristotelian
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Re: Take Advantage of Stable Value Fund?

Post by aristotelian » Sun Jun 17, 2018 11:31 am

LT Treasury is pretty unusual for your bond allocation. Are you aware of the duration risk?

I have access to TIAA Traditional in my plan which I use for a portion of my bond/fixed income allocation, however the yield is 4%. Personally I would not do the Stable Value with only 2.2% yield. That is barely better than VG Prime Money Market fund.

If you are looking to reduce interest rate risk, I would do total bond market or intermediate bond index instead.

Mors
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Re: Take Advantage of Stable Value Fund?

Post by Mors » Sun Jun 17, 2018 12:36 pm

You can use it to fund a part of your fixed-income allocation. it could be 2% to 5% of your fixed income allocation, the rest being the Long Term treasuries you mention. You lower a bit your expected returns, but you also lower the interest rate risk and you increase your diversification.

tibbitts
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Re: Take Advantage of Stable Value Fund?

Post by tibbitts » Sun Jun 17, 2018 12:42 pm

aristotelian wrote:
Sun Jun 17, 2018 11:31 am
LT Treasury is pretty unusual for your bond allocation. Are you aware of the duration risk?

I have access to TIAA Traditional in my plan which I use for a portion of my bond/fixed income allocation, however the yield is 4%. Personally I would not do the Stable Value with only 2.2% yield. That is barely better than VG Prime Money Market fund.

If you are looking to reduce interest rate risk, I would do total bond market or intermediate bond index instead.
From my 1.9% perspective 2.2% looks awesome. Yes I wish I had instead invested more in TIAA at the 3% guaranteed minimum - major judgement error there, I honestly didn't foresee a decade of near-zero rates that would drive stable value under 2%.

I ignored 6% guaranteed EE bonds too. Ugh.

Nate79
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Re: Take Advantage of Stable Value Fund?

Post by Nate79 » Sun Jun 17, 2018 3:39 pm

All of our fixed income is in our 401k stable value fund of similar yield. The low risk and no volatility means I can be more comfortable taking risk on the equity side.

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vineviz
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Re: Take Advantage of Stable Value Fund?

Post by vineviz » Sun Jun 17, 2018 3:51 pm

aristotelian wrote:
Sun Jun 17, 2018 11:31 am
LT Treasury is pretty unusual for your bond allocation. Are you aware of the duration risk?
As far as I can tell, as long as the duration of the bond fund is somewhat lower than your investment horizon, generally speaking bond fund holders tend to benefit in rising rate environments from rising yields more than they are hurt by falling prices.

This article explains it pretty well.

For an investor more than 10 years from retirement, I think the risks from trying to time the rate changes are great relative to just riding it out in an intermediate or long duration fund.

And a 90% equity portfolio probably has plenty of default/credit risk already: using the bond to specifically target duration/rate risk is possibly the most efficient use of the 10% bond allocation for most investors.

aristotelian
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Re: Take Advantage of Stable Value Fund?

Post by aristotelian » Sun Jun 17, 2018 4:00 pm

vineviz wrote:
Sun Jun 17, 2018 3:51 pm

As far as I can tell, as long as the duration of the bond fund is somewhat lower than your investment horizon, generally speaking bond fund holders tend to benefit in rising rate environments from rising yields more than they are hurt by falling prices.

This article explains it pretty well.

For an investor more than 10 years from retirement, I think the risks from trying to time the rate changes are great relative to just riding it out in an intermediate or long duration fund.

And a 90% equity portfolio probably has plenty of default/credit risk already: using the bond to specifically target duration/rate risk is possibly the most efficient use of the 10% bond allocation for most investors.
That is true but 17 years is a long time to wait, even for a risk tolerant investor. Most Bogleheads recommend total bond market (which includes long term) or intermediate because they are seeking stability from the bond side. I do hold a small amount of LTT but it is unusual to be the core bond holding of a portfolio.

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vineviz
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Re: Take Advantage of Stable Value Fund?

Post by vineviz » Sun Jun 17, 2018 4:22 pm

aristotelian wrote:
Sun Jun 17, 2018 4:00 pm
Most Bogleheads recommend total bond market (which includes long term) or intermediate because they are seeking stability from the bond side.
That definitely appears to be the prevailing conventional wisdom.

dbr
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Re: Take Advantage of Stable Value Fund?

Post by dbr » Sun Jun 17, 2018 4:36 pm

For a person long term 90% equities long term bonds, especially Treasuries, make perfect sense. Even if there is not some convincing proof that the choice is superior, it should be fine. A possibility is that if one wanted to cut down on the stock allocation a stable value fund could the place for that piece of reallocation. It is hard to argue that intermediate bonds are not a good choice for long term stock and bond portfolios. It is a cinch to argue that people fret over the issue way too much.

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Re: Take Advantage of Stable Value Fund?

Post by grabiner » Sun Jun 17, 2018 10:04 pm

vineviz wrote:
Sun Jun 17, 2018 3:51 pm
aristotelian wrote:
Sun Jun 17, 2018 11:31 am
LT Treasury is pretty unusual for your bond allocation. Are you aware of the duration risk?
As far as I can tell, as long as the duration of the bond fund is somewhat lower than your investment horizon, generally speaking bond fund holders tend to benefit in rising rate environments from rising yields more than they are hurt by falling prices.
However, the primary risk to long-term bonds is inflation. If you buy 20-year bonds worth $10,000 at maturity, and hold them to maturity, you don't care what happens to interest rates along the way; you will have your $10,000. But you don't know what you will be able to buy for that $10,000, which is just as important.

In addition, pension funds and insurance companies have future fixed-dollar liabilities, and thus they want to buy long-term bonds for risk reduction. This reduces the risk premium, making them less attractive to individual investors.

It makes more sense for individual investors holding long-term bonds to buy long-term TIPS, which eliminate these issues. (Vanguard doesn't have a long-term TIPS fund, but there is an ETF LTPZ, or you can buy individual TIPS.)
Wiki David Grabiner

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vineviz
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Re: Take Advantage of Stable Value Fund?

Post by vineviz » Mon Jun 18, 2018 8:10 am

grabiner wrote:
Sun Jun 17, 2018 10:04 pm
However, the primary risk to long-term bonds is inflation.
I'm not sure I agree with that, certainly not without some context.

Inflation is a risk that all investors face, and multiple factors can affect the degree to which it is the "primary" risk or not.

For investors who are early in their accumulation phase (as the OP seems to be), inflation risk is probably not a dominant concern. For investors nearing retirement or already in retirement who have accumulated a large enough portfolio that it doesn't need to be conservatively invested, inflation risk is probably not a dominant concern.

I say that because during periods of both high and low rates of inflation, historically, the best real (i.e. inflation-adjusted) returns have come from stocks and long-term treasury bonds.

Image

Assuming investors have enough capital to maintain a steady asset allocation and still meet their withdrawal needs, maintaining a portfolio exposed to equity risk and interest rate risk has been the best protection against inflation. This is because long-term bonds (and, to a lesser degree, intermediate bonds) have generally delivered returns in excess of (or close to) inflation during periods of high inflation whereas shorter duration bonds (or 30 day bills) have not.

But you raise an important point about inflation, especially for investors who (for whatever reason) are not in a position to tolerate the volatility in their portfolio that long-duration assets introduce. If they cannot maintain a healthy exposure to stocks and longer term bonds, inflation can be a powerful enemy. During the 1940s and 1970s/early 80s, investors who had conservative portfolios experienced negative real returns pretty consistently as I recall.

I agree with you that TIPS probably do represent a reasonable investment for a similar investor today. I don't think the stable value fund helps anyone in that boat, however.

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