Corp Bond Return Fund 4% Minimum [Thoughts?]

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Hogan773
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Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by Hogan773 » Fri Jan 26, 2018 4:02 pm

I have this fund in my Pension/401K options. I have some invested in it but wondering why I wouldn't put more of my Total Bond Market allocation into something like this. Seems I have a 4% MINIMUM return here which would seem much better than riding in bonds where I could have a flat or slightly negative return if rates are rising. Thoughts?




Objective

A principal preservation option that provides a positive and relatively stable rate of return. The rate of return will have a minimum annualized rate of 4%.


Strategy
A principal preservation option where returns for this choice are tied to a monthly rate published by the Internal Revenue Service (IRS) called the "third segment rate." The IRS develops "segment rates" through the construction of high quality (investment grade) corporate bond yield curves. The "third segment" refers to the long end of this constructed corporate bond yield curve. Balances allocated to this strategy will receive a daily credit at an annual percentage rate that is the greater of 4% or the 24-month average third segment rate published by the IRS. The rate credited for a particular month is based on the rate published by the IRS during the prior month.


Risk


The primary risk associated with this fund is related to inflation. If the rate of inflation were to exceed the return on this choice, then allocated balances would not sustain their purchasing power. These risks are somewhat mitigated due to the reference rate being the IRS' third segment rate which references investment grade corporate bonds. However, during periods of sustained or rapidly rising inflation, it is possible that fund's returns may not keep up with the rate of inflation.



Short Term Redemption Fee

None


Who May Want To Invest


Someone who is interested in a stable account balance that grows, over time, based on a daily interest crediting rate that is tied to IRS' third segment rate. This daily rate will not be negative and will not be lower than the annualized 4% minimum rate.


Someone who is interested in seeking to safeguard principal or balance a portfolio having more aggressive investments.


Additional Disclosures


An investment option who's daily fund price grows by the designated reference rate. For operational purposes, this investment choice is structured like a fund with a daily fund price that grows based the IRS' third segment rate (24 month average rate). This construct has been established to facilitate the operations of the plan which allows participants to allocate balances among this and other choices. This fund does not exist outside of the plan nor does the fund hold any assets.


This investment option is not a mutual fund, a collective fund, or a separate account.

ResearchMed
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Re: CORP BOND RETURN FUND 4% MINIMUM

Post by ResearchMed » Fri Jan 26, 2018 4:06 pm

Hmmm... I'm looking for the bit about how there might at some time be a "return of principal".

Do you see that anywhere in the fine print?

RM
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alex_686
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Re: CORP BOND RETURN FUND 4% MINIMUM

Post by alex_686 » Fri Jan 26, 2018 4:16 pm

OP - what is your question?
ResearchMed wrote:
Fri Jan 26, 2018 4:06 pm
Hmmm... I'm looking for the bit about how there might at some time be a "return of principal". Do you see that anywhere in the fine print?
I am going to guess that this is a stable value fund. A stable value fund is a customized insurance product offered via your retirement plan. Since these are all customized we can only offer general advice.

They are a fine product. Many Bogleheads use them.

Since they are a insurance product, some funds are only partially funded. Your principle could be at risk if the fund is underfunded and your company declares bankruptcy. So research this a bit. Anything over 80% is considered well funded.

There is a issue of "return of principal". If rates dropped a bond bond fund's NAV would increase, so you would lose out here. I was in a stable value fund during 2008. People with long bonds made out like a bandit, I only did so-so. Not the worse thing in the world but it does make it harder to evaluate.

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FiveK
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by FiveK » Fri Jan 26, 2018 4:31 pm

Hogan773 wrote:
Fri Jan 26, 2018 4:02 pm
This fund does not exist outside of the plan nor does the fund hold any assets.

This investment option is not a mutual fund, a collective fund, or a separate account.
Based on the quoted lines: is this for a non-qualified deferred compensation (NQDC) plan? If so, and if you are comfortable with the overall risks of an NQDC plan, 4% for a "bond" fund is good.
Last edited by FiveK on Fri Jan 26, 2018 4:59 pm, edited 1 time in total.

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ruralavalon
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by ruralavalon » Fri Jan 26, 2018 4:34 pm

Hogan773 wrote:
Fri Jan 26, 2018 4:02 pm
. . . This fund does not exist outside of the plan nor does the fund hold any assets.

This investment option is not a mutual fund, a collective fund, or a separate account.
This is a mystery to me. The fund holds no assets.

When you buy a share where does your money go? With no assets how does it generate any return at all?
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Hogan773
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by Hogan773 » Fri Jan 26, 2018 4:57 pm

FiveK wrote:
Fri Jan 26, 2018 4:31 pm
Hogan773 wrote:
Fri Jan 26, 2018 4:02 pm
This fund does not exist outside of the plan nor does the fund hold any assets.

This investment option is not a mutual fund, a collective fund, or a separate account.
Based on the quoted lines: is the for a non-qualified deferred compensation (NQDC) plan? If so, and if you are comfortable with the overall risks of an NQDC plan, 4% for a "bond" fund is good.
Yes it is in one of those. As I already have the money in there (I did this awhile back and then stopped adding more) it is just a question of allocating within that fund as part of my overall asset allocation.

I thought maybe better to take advantage of this type of fund and then allocate less into a "normal" bond fund in that account.

It does feel like a stable capital fund to me. I think in reality it might just be a fictional fund where they credit a given return to your assets. I just liked the idea of 4% MINIMUM. Yes I agree with another poster that if bond yields dive, I wouldn't ride UP the NAV while real bond prices were increasing, I would just keep chugging on with my 4%. But I especially liked the 4% now, while bond prices are falling as yields rise, and a normal fund might be breaking even or even slight decline.

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FiveK
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by FiveK » Fri Jan 26, 2018 5:03 pm

Hogan773 wrote:
Fri Jan 26, 2018 4:57 pm
I thought maybe better to take advantage of this type of fund and then allocate less into a "normal" bond fund in that account.
...
I think in reality it might just be a fictional fund where they credit a given return to your assets. I just liked the idea of 4% MINIMUM.
Very reasonable perspective and strategy. Good luck!

dbr
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by dbr » Fri Jan 26, 2018 5:06 pm

I think you should know more about where the money is coming from to provide stable + 4%, especially if this fund is restricted only to your employer. That does not mean I have the foggiest idea that there is anything wrong, just that it would be reassuring that the contract includes your employer subsidizing the deal when needed as that explains why the guarantee is so good. I also would want to understand where the money is and whether it will be there if your employer or whatever entity owns the fund goes bankrupt.

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FiveK
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by FiveK » Fri Jan 26, 2018 5:09 pm

dbr wrote:
Fri Jan 26, 2018 5:06 pm
I also would want to understand where the money is and whether it will be there if your employer or whatever entity owns the fund goes bankrupt.
It won't be, but that applies to the entire NQDC balance, not just this particular fund.

dbr
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by dbr » Fri Jan 26, 2018 5:21 pm

OK I understand now. The answer is that deferred comp plans are risky and should be undertaken with one's eyes wide open. Other than that I don't know enough about it to advise. I would think a guarantee of 4% would not by itself be a motivation to leave money in the plan, but it certainly seems like it would be nice alternative for money that is going to be in the plan.

I always feel a little baffled about how assets in plans like this should be treated. The risk is not like assets that are owned in 401k plans or taxable accounts. It might be such assets are not counted as assets at all but rather as at risk income that one intends to realize in the future.

Other people probably have a better perspective.

Mors
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by Mors » Fri Jan 26, 2018 9:15 pm

The fund has the potential to be a great addition to your portfolio, but there are risks involved that you should understand in order to evaluate properly.

Copying from the book "The Only Guide You_ll Ever Need for the Right Financial Plan Managing Your Wealth_ Risk_ and Investments" by Larry Swedroe about stable value funds.

"For those able to perform the necessary due diligence, the following are offered as criteria for an acceptable investment:

- The vehicle should carry contracts with multiple, high - quality insurers: insurers carrying a rating of at least AA or the equivalent from one of the major rating agencies.
- More than 90 percent of the portfolio should be covered with insurance contracts.
- At least 90 percent of the vehicle ’ s assets should be in investment -grade bonds, rated at least AA.
- The average maturity and duration of assets should be short term (not longer than three years).
- If the portfolio uses derivatives, there should be a thorough understanding of their usage and whether any leverage is involved.
- The fund ’s management team should have a record of producing returns that are competitive with its stable - value peers or an appropriate bond market index."

As long as the requirements above are more or less satisfied, you have yourself a winner that can fund a large part of your portfolio. 4% trashes even the most optimistic bond fund expected returns, and it is even possible to beat the us stock market for the next decade according to many forecasts (including John Bogle's). With that in mind and assuming it checks the considerations above, I could see allocations from 40% to 70% of the total portfolio in such a fund.

If it is more risky than suggested by Larry, then treat it as an alternative and lower your exposure to it (for example 20-30% of your portfolio at maximum, or even less).

Hogan773
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by Hogan773 » Mon Feb 12, 2018 3:51 pm

Mors wrote:
Fri Jan 26, 2018 9:15 pm
The fund has the potential to be a great addition to your portfolio, but there are risks involved that you should understand in order to evaluate properly.

Copying from the book "The Only Guide You_ll Ever Need for the Right Financial Plan Managing Your Wealth_ Risk_ and Investments" by Larry Swedroe about stable value funds.

"For those able to perform the necessary due diligence, the following are offered as criteria for an acceptable investment:

- The vehicle should carry contracts with multiple, high - quality insurers: insurers carrying a rating of at least AA or the equivalent from one of the major rating agencies.
- More than 90 percent of the portfolio should be covered with insurance contracts.
- At least 90 percent of the vehicle ’ s assets should be in investment -grade bonds, rated at least AA.
- The average maturity and duration of assets should be short term (not longer than three years).
- If the portfolio uses derivatives, there should be a thorough understanding of their usage and whether any leverage is involved.
- The fund ’s management team should have a record of producing returns that are competitive with its stable - value peers or an appropriate bond market index."

As long as the requirements above are more or less satisfied, you have yourself a winner that can fund a large part of your portfolio. 4% trashes even the most optimistic bond fund expected returns, and it is even possible to beat the us stock market for the next decade according to many forecasts (including John Bogle's). With that in mind and assuming it checks the considerations above, I could see allocations from 40% to 70% of the total portfolio in such a fund.

If it is more risky than suggested by Larry, then treat it as an alternative and lower your exposure to it (for example 20-30% of your portfolio at maximum, or even less).

So coming back to this topic of the 4% Minimum Corp Bond Fund and how much I can/should put into it.....

I looked and this option is ONLY available in my "Pension" plan. In my "401K" and my "Deferred Compensation" plans I have a choice of several bond funds (I current choose Vanguard Total Bond Mkt instead of the more expensive Western Asset or PIMCO) and Stable Capital. I have about 50/50 in the Vanguard Total Bond Mkt and Stable Capital in the bond portion of those accounts.

QUESTION is should I "max out" my investment in that Corp Bond 4% fund? What I mean is that in my Pension account I also have allocations to some stock funds. What I could do is "swap" some of the Stable Value funds held in my 401K or Deferred into Equities, and then simulateously swap the Equities in my Pension over to the 4% Minimum fund. Would seem to be smart to trade a principal-protected option earning 2.2% for an option that "guarantees" 4% right?

Are there other considerations I am missing? I had generally loaded the Deferred account into 100% bonds/stable value with the view that this account would be ultimately distributed to me first, whenever I leave my employer, and cannot be rolled over, and thus it will become taxable income "first". Therefore I should want it to be in the slowest growing investments while other accounts that can be rolled over such as a 401K would be better places to carry equities. The total amount of my Pension Account is about 5% of my overall portfolio (taxable/tax protected) so "loading up" on that 4% Minimum fund isn't going crazy....it is just maxing out on the potential to ride in that fund if we think it is an interesting and unique investment choice.

Mors
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by Mors » Mon Feb 12, 2018 6:18 pm

The considerations are the ones mentioned in my previous post. If it satisfies them, then yes, it makes sense to use the stable value fund in your pension plan.

Hogan773
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by Hogan773 » Tue Feb 13, 2018 11:40 am

The current "IRS third segment rate" is like 4.5% so that is what I would be getting credited, with a minimum of 4% although it appears the "third segment rate" has been more like 4.5% to 5.0% over the past few years.

I am having trouble finding detailed info on the fund beyond what I posted earlier. Fidelity doesn't have any additional info or fact sheets or prospectus on it. So I don't really know the manager or the fees.

Still, it seems like worthwhile risk to max out on it in that Pension fund instead of holding Stable Capital. The most I can get is about 4% of my total portfolio as that is the total amount of money in this Pension account, and that is just a subset of the 35% I have in bonds/fixed income/stable capital/money market.

Hogan773
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Re: Corp Bond Return Fund 4% Minimum [Thoughts?]

Post by Hogan773 » Tue Feb 13, 2018 4:27 pm

Hogan773 wrote:
Tue Feb 13, 2018 11:40 am
The current "IRS third segment rate" is like 4.5% so that is what I would be getting credited, with a minimum of 4% although it appears the "third segment rate" has been more like 4.5% to 5.0% over the past few years.

I am having trouble finding detailed info on the fund beyond what I posted earlier. Fidelity doesn't have any additional info or fact sheets or prospectus on it. So I don't really know the manager or the fees.

Still, it seems like worthwhile risk to max out on it in that Pension fund instead of holding Stable Capital. The most I can get is about 4% of my total portfolio as that is the total amount of money in this Pension account, and that is just a subset of the 35% I have in bonds/fixed income/stable capital/money market.
Basically I tried multiple people at Fidelity and my own HR and nobody really knows more than what I can click on the website, which isn't really anything. These are legacy plans and I'm sure someone, somewhere, knows how they work but I doubt I will ever find the person who knows that detail.

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