Why no stable value accounts for "retail" investors?

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whyme
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Why no stable value accounts for "retail" investors?

Post by whyme » Wed Oct 11, 2017 12:20 pm

Just wondering: why are stable value products limited to employer retirement vehicles like 401k or 403b accounts? I get that the insurance companies want predictable flows of cash into and out of the fund--as opposed to trading--but it seems to me that if that were the only issue, someone could set up conditions or penalties that would effectively enforce a long term approach upon their investors.

I'm sure there would be great interest in such a product if it were available within IRA or taxable accounts; is there some regulation that would make those illegal or prohibitively expensive?

student
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Re: Why no stable value accounts for "retail" investors?

Post by student » Wed Oct 11, 2017 1:04 pm

I think the market had tried to offer it many years ago. See https://www.financial-planning.com/news ... ing-retail

nervouscorps
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Re: Why no stable value accounts for "retail" investors?

Post by nervouscorps » Wed Oct 11, 2017 1:09 pm

My guess is too many people would use them, and also because of their structure, they are more like a insurance policy than a security or bond. So it may not even be permitted.

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Phineas J. Whoopee
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Re: Why no stable value accounts for "retail" investors?

Post by Phineas J. Whoopee » Wed Oct 11, 2017 3:11 pm

There are two common types of stable value funds, and neither will work well if investors move into or out of them quickly. They're limited to employer-based retirement accounts because it's likely the bulk of investors will stay put.

Guaranteed Investment Contracts (GIC): The fund is offered by an insurance company, which covers interest and redemptions out of its general account. At any given time the company may or may not be able to cover many simultaneous redemptions along with its other obligations.

Synthetic Guaranteed Investment Contracts (SGIC): The fund directly owns bonds, which are longer duration than money market securities. It earns higher yields by taking duration risk. One or more (usually more) insurance companies charge a premium in return for guaranteeing a $1.00 per share value. To keep the premium down, there's a level below which the insurers are contractually entitled not to pay.

In both cases in order to mitigate the risks a stable value fund has the right (read the legal documents) to limit redemptions. I had one where they could limit them for up to ten years. In the case of a GIC, the insurer (should it stay solvent) has time to recover from an adverse event. With an SGIC, the fund owns the bonds directly, and the delay is to give the securities enough time to mature and pay out.

I think one shouldn't suppose consistently higher return is available without consistently higher risk. In this case the risk is mostly liquidity, rather than share price.

PJW

bberris
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Re: Why no stable value accounts for "retail" investors?

Post by bberris » Wed Oct 11, 2017 3:16 pm

The stable value fund works because of the limited potential for withdrawals and the captive group for contributions. As a result, the fund does not have to deal with "runs" as a publicly available fund would. A run on the fund might require the sale of paper at a loss, which would break the $1.00 value.

whyme
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Re: Why no stable value accounts for "retail" investors?

Post by whyme » Wed Oct 11, 2017 10:00 pm

Phineas J. Whoopee wrote:
Wed Oct 11, 2017 3:11 pm
There are two common types of stable value funds, and neither will work well if investors move into or out of them quickly. They're limited to employer-based retirement accounts because it's likely the bulk of investors will stay put.
Thanks for the reply. I still don't understand why someone doesn't offer a stable value product with a provisio that contributions can't be withdrawn for five or six years, or that no more than X percent can be withdrawn during any given year, or whatever arrangement would make it viable. I'm sure many would accept such conditions, particularly if they were in the accumulation stage in an IRA account, or if they are withdrawing in retirement and don't have a need to spend their principal.

TropikThunder
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Re: Why no stable value accounts for "retail" investors?

Post by TropikThunder » Wed Oct 11, 2017 10:16 pm

whyme wrote:
Wed Oct 11, 2017 10:00 pm
Phineas J. Whoopee wrote:
Wed Oct 11, 2017 3:11 pm
There are two common types of stable value funds, and neither will work well if investors move into or out of them quickly. They're limited to employer-based retirement accounts because it's likely the bulk of investors will stay put.
Thanks for the reply. I still don't understand why someone doesn't offer a stable value product with a provisio that contributions can't be withdrawn for five or six years, or that no more than X percent can be withdrawn during any given year, or whatever arrangement would make it viable. I'm sure many would accept such conditions, particularly if they were in the accumulation stage in an IRA account, or if they are withdrawing in retirement and don't have a need to spend their principal.
I would imagine most investors would not put up with those restrictions for a "measly 3.5%" (or whatever the SV fund paid). If you've read any of the threads on here about TIAA Traditional, you may have noticed a lot of moaning, complaining, and "don't use it!!" comments about the payout restrictions on Traditional (a lot of the negativity is based on not realizing there are different flavors of Traditional but that's a topic for another day).

AlohaJoe
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Re: Why no stable value accounts for "retail" investors?

Post by AlohaJoe » Wed Oct 11, 2017 10:30 pm

According to the Stable Value Investment Association all of the above guesses are wrong.

Unfortunately their FAQ doesn't provide much detail only saying "regulations prevent it".

stlutz
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Re: Why no stable value accounts for "retail" investors?

Post by stlutz » Thu Oct 12, 2017 12:11 am

Aren't direct CDs a better solution to the problem? Stable asset funds aren't guaranteed by the government unlike CDs.

rrppve
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Re: Why no stable value accounts for "retail" investors?

Post by rrppve » Thu Oct 12, 2017 12:19 am

Direct CDs are an alternative, but not necessarily better. You have to accept considerable term risk in order to get better yields than some Stable Value Funds. My 401k SVF yields 2.33% and Colorado's 529 SVF yields, 2.59%. Currently only a select few 5 year CDs beat that.
My perception of the credit risk in SVF is that it's very small. I did not hear of any SVFs where investors lost money in the Great Recession even though a money market fund, Prime Reserve, busted the buck.
I'd be a potential user of a retail SVF in my solo 401k or IRAs if it were available.

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Earl Lemongrab
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Re: Why no stable value accounts for "retail" investors?

Post by Earl Lemongrab » Thu Oct 12, 2017 1:50 pm

whyme wrote:
Wed Oct 11, 2017 10:00 pm
Thanks for the reply. I still don't understand why someone doesn't offer a stable value product with a provisio that contributions can't be withdrawn for five or six years, or that no more than X percent can be withdrawn during any given year, or whatever arrangement would make it viable. I'm sure many would accept such conditions, particularly if they were in the accumulation stage in an IRA account, or if they are withdrawing in retirement and don't have a need to spend their principal.
While some stable-value funds pay 3% or better, that's usually because of contractual reasons. Megacorp pays 2.42% currently. The TSP G fund is 2.250%. That's about what you can get with 5-year CDs. Wouldn't be much point.
This week's fortune cookie: "You will do well to expand your horizons." Ow. Passive-aggressive and vaguely ominous.

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jhfenton
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Re: Why no stable value accounts for "retail" investors?

Post by jhfenton » Thu Oct 12, 2017 1:56 pm

Earl Lemongrab wrote:
Thu Oct 12, 2017 1:50 pm
While some stable-value funds pay 3% or better, that's usually because of contractual reasons. Megacorp pays 2.42% currently. The TSP G fund is 2.250%. That's about what you can get with 5-year CDs. Wouldn't be much point.
And the one in my midcorp Fidelity 401(k) yields 1.53% (as of 9/30/17). It's consistently a few basis points above the 2 yr Treasury yield. I haven't touched it.

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