Heavy Loss in Stable Value Fund of 401k investments

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mtmingus
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Heavy Loss in Stable Value Fund of 401k investments

Post by mtmingus » Thu Oct 18, 2018 9:48 am

Hello,

My first post here but a sad one. I had a more than 5% loss early this week in a "Stable Value Fund" of my prior employee's 401(k) investments.
The plan admin probably realized the shaking ground of this investment and decided to terminate this investment option this week. I had all my money in this fund since I was about to rollover to my current employee sponsored plan. The loss was realized when this fund was terminated and all money was converted into a Money Market Fund by default.

I had no idea a stable value could go down as more than 5%. The plan admin even sent out a letter to all participants that this fund lost 4% on Oct 8 (one week before the 5% loss).

A Stable Value Fund turned out to be a lot more risky than the SP500 index.

I'd appreciate your wisdom if there is any course I can take at this moment.
Thanks!

Mingus

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Dottie57 » Thu Oct 18, 2018 10:01 am

I think it depends on what the stable value fund invests in. My former employer put the money in guaranteed contracts (insurance companies?). The fund dindn’t lose money during the Great Recession, but plodded on with about 2% return.

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mtmingus
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by mtmingus » Thu Oct 18, 2018 10:08 am

This fund had never had any problem in the past (17+ years since I started), returned over 3% year after year until this week.
Never had a loss when I exchanged it out and into something else.

Yes it also invested in insurance contracts like most other Stable Value Funds do.

Mingus.

aristotelian
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by aristotelian » Thu Oct 18, 2018 10:11 am

Would you mind sharing the name of the fund?

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mtmingus
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by mtmingus » Thu Oct 18, 2018 10:15 am

The name may not mean much since every 401k plan may have it's own way of constructing a stable value. Some good, some terrible, like this one:

Gibraltar Guaranteed Fund

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Dottie57 » Thu Oct 18, 2018 10:28 am

The Stable Value fund which I have invested is called “Galliard Capital Management”. I think the important part is the value shown at Fidelity is the book value and NOT the market value. I believe book value is purchase price of underlying contracts plus interest.

When your company exited the stable value fund, it probably received market value since contracts had to be sold in the fund in order to turn them into cash for participants. Bonds have lost value and so have contracts.

Under the risk section on the Stable value fund is where I found the information on book value vs market value.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by deikel » Thu Oct 18, 2018 11:15 am

mtmingus wrote:
Thu Oct 18, 2018 9:48 am
A Stable Value Fund turned out to be a lot more risky than the SP500 index.

I'd appreciate your wisdom if there is any course I can take at this moment.
Thanks!

Mingus

Although your losses have indeed been realized by selling the underlying asset - you could invest it immediately (in a supposed to be suppressed overall market) and hence not loose much at all (only the loss specific to your fund vs say S+P500) - your 401k does presumably not charge you for transactions, so this in and out does not do any harm itself and is the underlying idea of tax loss harvesting (which does not apply to you since the asset sits in a 401k)

In the greater scheme of 30 yrs investing, this means nothing loss wise and hopefully helped you realizing/feeling your risk tolerance (or its absence) and will help you in the future to avoid funds that have funny names, you dont fully understand and still invest based on some fund managers 'winning' strategy besdies claimimng to be 'stable' (PS: there is no such thing as stable in investing).

chalk it up as a learning experience
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by goingup » Thu Oct 18, 2018 11:25 am

mtmingus-
Welcome to the forum!
Thanks for sharing your experience. I had no idea that a Stable Value fund could lose money. :confused I have never read about it happening here or elsewhere. Sorry that happened to you!

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Mitchell777 » Thu Oct 18, 2018 11:53 am

I knew they could lose money if one of the underlying insurance companies declares bankruptcy because I lived through that years ago. Never heard of this situation before. Sorry for the financial loss.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by mtmingus » Thu Oct 18, 2018 11:54 am

Thanks everyone for your thoughts.
For the same reason that I like to share this terrible experience to alert a lot of investors that Stable Value is not stable, is not Money Market Fund, even when some had a word Guaranteed in it's name, they are not.
It's a mistake to think it as a bond fund as well. You would have never seen a bond fund losing 5% in a day.
If this kind of investment is so strange and risky I don't know why they are allowed to be named Stable Value Fund. We didn't have any short term bond or Money Market fund for this 401k plan for many years and a lot of us thought this would be the safest investment choice.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by cas » Thu Oct 18, 2018 11:56 am

mtmingus wrote:
Thu Oct 18, 2018 10:15 am
Gibraltar Guaranteed Fund
(Sorry, OP, no answer to your question about whether there is anything you can do now. (Except possibly, if it is your employer whose meeting minutes I link below, finding out what they are talking about with amortizing the loss in the replacement bond fund.) The information below sadly does not help you, but I thought that it might be interesting/actionable for other people.)

I googled Gibraltar Guaranteed Fund and unearthed a couple of things, one informational and one rather disturbing (to me).

The informational item: this appears to be the short-form Fund Fact Sheet (not the whole prospectus. It would be interesting to know what was listed as "risks" in the prospectus.) https://www.retirement.prudential.com/R ... COLGGF.pdf

One slight eye-brow raiser (to me) in the Fund Fact Sheet is that this fund seems to be a product of a single insurance company (Prudential), rather than having 3-5 different insurance companies providing insurance wrappers. But, in the end, the loss doesn't seem to be a problem with the single insurance company (or at least not with its solvency, which is one of the usual risk you see mentioned with stable value funds. However, as you can read below, there could be an issue with the duration risks Prudential decided to take.)

Actionable item: Are stable value funds constructed with the insurance wrappers from multiple companies less at risk of what the OP experienced? I don't know. Kind of seems like this might be less an issue of how the insurance part was structured and more a problem self-inflicted by the investment committee at the employer on their own employees (see below)?

The disturbing (to me) item: I don't know if this is OP's employer, or just one of many employers who chose the fund. But here are minutes of a meeting in which an investment committee decided to dump the fund:
"PENSION REVIEW COMMITTEE RECOMMENDATION: REPLACE GIBRALTAR GUARANTEED FUND WITH CORE INTERMEDITE [sic] BOND FUND"; May 3, 2018; http://lancaster.ne.gov/clerk/agenda/20 ... raltar.pdf

I'm no expert on the pressures experienced by investment committees, but this sounds to me suspiciously like, when risk came home to roost, the investment committee panicked a bit, decided to market time interest rates and yield curve dynamics, and jumped ship, leaving the fallout with their employees invested in the fund. What would have happened to the principal of the individual investors if the investment committee had kept the fund and let individual investors decide to bail as the crediting rate fell? (For that matter, what did the talk about amortizing the loss mean for the principal of individual investors from one day to the next when the switch to the short term bond fund was made? Is this a different situation that what OP saw, where his/her principal dropped 5% from one day to the next?)

Actionable item: Since the unusually long duration of the underlying investments seems to be the issue with this fund, maybe people with investments in stable value funds should go find the tiny small print where it says what the duration of the underlying investments are? (Exercise for the reader: without using search, how long does it take you to find the duration in the Fund Fact Sheet for the Gibraltar Guaranteed Fund?)
During the past several years the Gibraltar Guaranteed Fund has performed very well, ranking as one of
the best funds in the stable value category. Gibraltar employs a strategy based on the Barclay's Capital
Aggregate Fund Index, which results in holding assets for longer durations than most stable value funds.
The longer durations have helped Gibraltar because interest rates have been stable. However, the bond
market has now entered a period of rising interest rates, and longer durations are beginning to hurt
Gibraltar returns.

Prudential has proposed replacing Gibraltar with the Core Intermediate Bond Fund. CIBF holds assets
for shorter durations, averaging 4.23 years compared to Prudential's 6.02 years. This provides an
advantage when interest rates are rising. Moreover, CIBF is more actively managed the Gibraltar, which
is also an advantage in a rising interest rate environment. Additionally, CIBF has a lower expense ratio
than Gibraltar. During the last year CIBF returns have increased by approximately 100 bps.

However, the market value to book value ratio for Gibraltar is 95.81% as of April 20, 2018. This means
that liquidation of the Gibraltar account would yield only 95.81C on the dollar. The market value to
book value ratio is also known as the market value adjustment, or MVA. It should be noted that the
MVA for Gibraltar was 96.82% on March 29, 2018, indicating the Gibraltar MVA continues to fall as
interest rates are rising.

If the County decides to move from Gibraltar to CIBF, the CIBF returns will be negatively affected by the
Gibraltar MVA. On the day the Gibraltar funds are transferred to CIBF the existing market value for
Gibraltar would also be transferred. The Gibraltar MVA would then be amortized, thereby negatively
affecting the CIBF rate during the amortization period.

On the other hand, moving from Gibraltar will minimize the effects of the declining MVA. Also, as the
longer duration Gibraltar assets are replaced with shorter duration assets, the CIBF yield is expected to
increase in the rising interest rate environment. In this regard, the Federal Reserve Board has indicated
more interest rate increases will be implemented during the upcoming year.

After carefully reviewing the information presented, the Committee determined that the advantages of
moving from Gibraltar to CIBF outweigh the disadvantages.
The part that is disturbing to me: I had heard of stable value funds loosing money when the employer or an insurance company providing the insurance wrapper had gone out of business. I hadn't heard about a case of stable value funds loosing money (and having the loss passed on to the investors in the fund) because the (solvent) employer just decided to switch products in order to get a better ongoing yield.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by jhfenton » Thu Oct 18, 2018 12:07 pm

No stable value fund should be susceptible to a 9% (4% + 5%) drop during a period of calm in the financial markets.

Depending on the size of your account, I would do more research and strongly consider getting legal advice. Since it is your previous employer's 401(k), you would be in a less-conflicted position than current employees in getting the legal ball rolling.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Northern Flicker » Thu Oct 18, 2018 1:27 pm

This is why it is important to understand what the underlying assets are in a stable value fund. This may not be easy to do as the issuers may not publish the portfolio they hold for the fund. Some stable value funds have assets that are commingled with the general portfolio of an insurance company and theoretically may be subject to claims of beneficiaries of other products of the insurance company.

The issuers of the contracts do not necessarily have to be insolvent for the fund to sustain a loss. Most stable value funds have triggering events that allow withdrawals to be at market value. Ultimately, you should be comfortable with the level of risk of the underlying portfolio because you ultimately are exposed to that risk.

A 9% loss is significant for a fixed income investment, but would not be evidence of an investment being riskier than an S&P500 index fund.
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Northern Flicker » Thu Oct 18, 2018 1:40 pm

I'd appreciate your wisdom if there is any course I can take at this moment.
I have no advice about what recourse you may have, but if you look at your total return of the fund for your holding period including the loss at the end, and compare to a total bond index fund return, you may find it tracked more closely than give the 9% loss at the end might feel emotionally.

The fund may have credited its 3% rate at times when bond prices were falling so that you had a positive return at times a bond fund would have had a negative return. Once this is factored in, the performance relative to the broad bond market may look better than it feels when you get jarred suddenly with a 9% loss.
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mtmingus
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by mtmingus » Thu Oct 18, 2018 1:53 pm

If I had known better. Instead of moving all my money into this Stable Value Fund on Oct 9 last week to get ready for the rollover, rather into the Vanguard MMF, I would have a better than 4% not a -0.5% return YTD.

I am out of this 401k plan now.

Thanks everyone for your wisdom!

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by prudent » Thu Oct 18, 2018 2:18 pm

Maybe I missed it, but I couldn't tell if the large drop triggered the company to ditch the fund, or if ditching the fund triggered some kind of penalty that created the appearance of a large drop which only affected investors from this 401k plan.

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mtmingus
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by mtmingus » Thu Oct 18, 2018 2:53 pm

This kind of investment should have been banned in 401k plans when there is a discrepancy between so called NAV and book value.

Apparently it only made to be known in a letter dated Oct 10th that this "fund" has been losing value. The mass exodus didn't help on the termination date Oct 15th.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by inbox788 » Thu Oct 18, 2018 3:21 pm

cas wrote:
Thu Oct 18, 2018 11:56 am
The part that is disturbing to me: I had heard of stable value funds loosing money when the employer or an insurance company providing the insurance wrapper had gone out of business. I hadn't heard about a case of stable value funds loosing money (and having the loss passed on to the investors in the fund) because the (solvent) employer just decided to switch products in order to get a better ongoing yield.
I thought the whole scheme behind these Stable Value Funds involved the insurance company guaranteeing the principal. Is there a 5% or 10% deductible? Something doesn't add up here.
Preservation of capital plus competitive intermediate-term returns
Principal and accumulated interest are guaranteed by Prudential Retirement Insurance and Annuity Company
Investor Profile
Investors seeking income and safety of principal
https://www.retirement.prudential.com/R ... COLGGF.pdf

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Northern Flicker » Thu Oct 18, 2018 3:53 pm

mtmingus wrote:
Thu Oct 18, 2018 1:53 pm
If I had known better. Instead of moving all my money into this Stable Value Fund on Oct 9 last week to get ready for the rollover, rather into the Vanguard MMF, I would have a better than 4% not a -0.5% return YTD.

I am out of this 401k plan now.

Thanks everyone for your wisdom!
Ouch!

An interesting point about SVF’s is that when the assets for the fund are segregated from other assets of the issuer, there is a benefit that beneficiaries of other products of the insurance company cannot make claims against the SVF assets. But there is a downside in that the company can more easily implement triggers to process withdrawals at market value of the underlying assets. (When assets from many products are commingled, the company cannot easily give some customers a haircut, and not others).
Index fund investor since 1987.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by bberris » Thu Oct 18, 2018 4:16 pm

inbox788 wrote:
Thu Oct 18, 2018 3:21 pm
cas wrote:
Thu Oct 18, 2018 11:56 am
The part that is disturbing to me: I had heard of stable value funds loosing money when the employer or an insurance company providing the insurance wrapper had gone out of business. I hadn't heard about a case of stable value funds loosing money (and having the loss passed on to the investors in the fund) because the (solvent) employer just decided to switch products in order to get a better ongoing yield.
I thought the whole scheme behind these Stable Value Funds involved the insurance company guaranteeing the principal. Is there a 5% or 10% deductible? Something doesn't add up here.
Preservation of capital plus competitive intermediate-term returns
Principal and accumulated interest are guaranteed by Prudential Retirement Insurance and Annuity Company
Investor Profile
Investors seeking income and safety of principal
https://www.retirement.prudential.com/R ... COLGGF.pdf
The stability is only offered, and only offerable, if the investment is continually available to participants. The scheme works because participants are more or less trapped into the option while they are employed. So withdrawals can be met with new deposits, or a small amount of borrowing by the fund, or realizing a small loss and covering it up by reducing future yield. None of these are available when the option is dropped wholesale. That was a decision of the employer or their advisor.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Nate79 » Thu Oct 18, 2018 6:02 pm

delete

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by inbox788 » Thu Oct 18, 2018 6:07 pm

bberris wrote:
Thu Oct 18, 2018 4:16 pm
The stability is only offered, and only offerable, if the investment is continually available to participants. The scheme works because participants are more or less trapped into the option while they are employed. So withdrawals can be met with new deposits, or a small amount of borrowing by the fund, or realizing a small loss and covering it up by reducing future yield. None of these are available when the option is dropped wholesale. That was a decision of the employer or their advisor.
Well, it seems it would have been a better cover-up to keep the stable fund and quietly hope reduced yields would fix things, but maybe they came up against some regulatory issue or required disclosure requiring the 4% loss letter disclosure. Maybe they're hoping employees won't understand the amortization ramifications.
If the County decides to move from Gibraltar to CIBF, the CIBF returns will be negatively affected by the
Gibraltar MVA. On the day the Gibraltar funds are transferred to CIBF the existing market value for
Gibraltar would also be transferred. The Gibraltar MVA would then be amortized, thereby negatively
affecting the CIBF rate during the amortization period.
If I had the option, I'd be pulling my funds out of this short term bond fund that is negatively affected and investing in one that returns market rates. And if many people did that, I would expect the folks remaining in the fund would be in this amortization period for a longer time. On second reading, I may be reading that backwards, and the haircut would already have taken place, but at best I would expect the for the new fund would be market rates run by the same folks that messed up the stable value fund.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by megabad » Thu Oct 18, 2018 6:30 pm

mtmingus wrote:
Thu Oct 18, 2018 9:48 am
Hello,

My first post here but a sad one. I had a more than 5% loss early this week in a "Stable Value Fund" of my prior employee's 401(k) investments.
The plan admin probably realized the shaking ground of this investment and decided to terminate this investment option this week. I had all my money in this fund since I was about to rollover to my current employee sponsored plan. The loss was realized when this fund was terminated and all money was converted into a Money Market Fund by default.

I had no idea a stable value could go down as more than 5%. The plan admin even sent out a letter to all participants that this fund lost 4% on Oct 8 (one week before the 5% loss).

A Stable Value Fund turned out to be a lot more risky than the SP500 index.

I'd appreciate your wisdom if there is any course I can take at this moment.
Thanks!

Mingus
While a stable value fund in a qualified plan can indeed lose money, it is extremely rare for one of significant size to do so. Almost unheard of. As some of the prior posters indicated, in general with higher return comes more risk. Stable value funds count on limited turnover. The only time I hear about issues is during a run on the fund. This may happen when the underlying program supported is not doing well (bankrupt like in the financial crisis).

I suppose an extremely poorly managed fund could lose more than 5% in normal conditions but they are usually a collection of managers and insurance companies and I cannot imagine all of them would be equally poor at the same time.

There have been lawsuits about stable value funds being too conservative as well as too risky, so I am sure you have options. None of them are likely to fully compensate you for your losses. FYI you have likely still beaten my stable value returns as my interest rate has been under 3% for many years, so I am not sure how much in "losses" you really have here compared to many other stable value holdings. Just a glass half full way of looking at it.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by mtmingus » Thu Oct 18, 2018 6:46 pm

I was 55% Vanguard sp500 index Vinix and 45% this SVF until Oct 9th, went all SVF preparing for my rollover to my current 401k. On October 15 this SVF was terminated and converted into Vanguard Treasury MMF, a haircut more than 5%.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by bberris » Fri Oct 19, 2018 4:57 pm

bberris wrote:
Thu Oct 18, 2018 4:16 pm
The stability is only offered, and only offerable, if the investment is continually available to participants. The scheme works because participants are more or less trapped into the option while they are employed. So withdrawals can be met with new deposits, or a small amount of borrowing by the fund, or realizing a small loss and covering it up by reducing future yield. None of these are available when the option is dropped wholesale. That was a decision of the employer or their advisor.
From OP:
Well, it seems it would have been a better cover-up to keep the stable fund and quietly hope reduced yields would fix things, ...

[/quote]

Maybe they decided that if they reduced future yields sufficiently to cover the loss, there would be even more withdrawals, more losses, and more yield haircuts. In order to avoid a death-spiral, they just terminated the fund. Though it seems to me that there would be the option to have the insurance co. eat the loss.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Peter Foley » Sat Oct 20, 2018 10:44 am

Interesting thread. We have the majority of our non equities in stable value funds so the reported incident will inspire me to take a look under the hood.

Hindsight is 20/20 of course but I would not have parked short term money in a stable value fund. Both my wife and I have access to government stable value funds. All the funds come with limitations concerning withdrawals. We can only withdraw so much per year or under special circumstances (unlimited the year one turns 65 for example). By limiting withdrawals the funds are able to invest in slightly longer term interest rate products thereby increasing yield slightly. This helps them stay competitive with bond funds. Among other considerations, limiting withdrawals discourages the use of the funds as a parking place for market timing activities.

I do not think the stable value funds we own are unique in their withdrawal restrictions and would be be interested in hearing from others if they believe this is added protection against the heavy loss incurred by the OP.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by z3r0c00l » Sat Oct 20, 2018 10:49 am

Yikes, glad I selected the intermediate bond fund instead. The stable value fund in our 401K (Galliard Capital, iirc) has the highest er of any option, over .5%, and is so complex as to be basically opaque to an outsider like me. If I don't understand how it works, I generally avoid it. By comparison the bond fund ER is .02% and it is simply structured.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Northern Flicker » Sat Oct 20, 2018 1:05 pm

This kind of investment should have been banned in 401k plans when there is a discrepancy between so called NAV and book value.
All stable value funds will exhibit such a discrepancy between fund value and asset value of the underlying securities. That is in fact the core feature that makes them a stable value fund. By restricting liquidity, the fund manager hopes to process withdrawals in a manner that avoids having to sell bonds when they are under water because interest rates rose or credit spreads widened. If they do not have the liquidity to process withdrawals, they must have the contractual ability to restrict liquidity or return assets at market value, or they would default on their contractual obligations.

A simple analogy is a CD ladder constructed with broker CDs. When you maintain auch a CD ladder you restrict withdrawals to the liquidity provided by generated interest and maturing CDs. Doing so, enabled the CD to maintain stable value even though its market value will deviate as rates fluctuate. If you need to withdraw more than accumulated interest at other times, you will have no choice but to sell a CD at market value, and stable value is no longer maintained.
Last edited by Northern Flicker on Sat Oct 20, 2018 7:43 pm, edited 1 time in total.
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by dm200 » Sat Oct 20, 2018 1:07 pm

mtmingus wrote:
Thu Oct 18, 2018 9:48 am
Hello,
My first post here but a sad one. I had a more than 5% loss early this week in a "Stable Value Fund" of my prior employee's 401(k) investments.
The plan admin probably realized the shaking ground of this investment and decided to terminate this investment option this week. I had all my money in this fund since I was about to rollover to my current employee sponsored plan. The loss was realized when this fund was terminated and all money was converted into a Money Market Fund by default.
I had no idea a stable value could go down as more than 5%. The plan admin even sent out a letter to all participants that this fund lost 4% on Oct 8 (one week before the 5% loss).
A Stable Value Fund turned out to be a lot more risky than the SP500 index.
I'd appreciate your wisdom if there is any course I can take at this moment.
Thanks!
Mingus
I did not realize this either.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by train12 » Sat Oct 20, 2018 3:05 pm

mtmingus wrote:
Thu Oct 18, 2018 6:46 pm
I was 55% Vanguard sp500 index Vinix and 45% this SVF until Oct 9th, went all SVF preparing for my rollover to my current 401k. On October 15 this SVF was terminated and converted into Vanguard Treasury MMF, a haircut more than 5%.
If it makes you feel better VINIX has dropped 3.9% since Oct 9th too, so you only lost a tad bit more with the SVF.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by newtonc » Sat Oct 20, 2018 4:23 pm

We have Galliard Capital Management as the investment advisor and 5 different insurance companies as the contract issuers. The state of NC has had these folks for about 8 years and we know going in that the rate is guaranteed for the year. Investors seeking safety of principle and income are the people who choose this fund and it is guaranteed 2.13% for the current year.
Sorry about yours because I have not heard of that.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Rogue Wave » Sat Oct 20, 2018 4:39 pm

If I were in your position I would be VERY interested in seeing if you can obtain any information of outflows from the fund by employees just before the conversion.

As in, did insiders in the company in HR or at C Level take advantage of prior knowledge at the detriment of other employees.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by CollegePrudens » Sat Nov 10, 2018 8:05 am

Here is a paper from Vanguard that goes into money market vs stable value funds inside a defined contribution plan: https://personal.vanguard.com/pdf/ISGSVMM.pdf

It is too late for the OP, but hopefully the paper will help others understand the nature (including) risk of stable value funds vs money market funds.
We need to learn to want what we have, not to have what we want, in order to get stable and steady happiness - The 14th Dalai Lama

Sargon
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Sargon » Sat Sep 21, 2019 7:37 pm

This is my first post also and very similar to yours, just about a year later.
I had my wife's 401k fully invested in a Fixed Account/Stable Value/Money Market Fund because I was concerned about market volatility and wanted a safe place to park her money for awhile. When we first heard about her company being bought out, we decided to leave her money where it was while we figured out where we wanted to transfer the funds.
When her company was bought out by another firm, they terminated the 401k plan.
That is what triggered the loss in her account. The Book Value/Market Value difference that had to be made up using
Market Value Adjustments (MVA) by the Fund Administrator.
This was my first experience with a Stable Value Fund. Actually, up until a few days ago,I thought "stable" was just an adjective describing the fund
rather than an actual type of fund. I have been investing for over 30 years, but didn't know about this. Turns out there was a good reason. It is my understanding that these SV Funds are ONLY offered through employer's 401k plans. My wife's company began offering a 401k only a few years ago, so
I wasn't aware of SVF's.

Here are my thoughts on this investment vehicle:
1. I think by allowing the use of the word Money Market in the title they are intentionally misleading.
2. The fund is more like an annuity in that MVA's are used like surrender charges.
3. If you are invested in an SVF and find out that your company is about to terminate their 401k plan, transfer your money to another fund ASAP.
4. Make sure that you FULLY understand what you are investing in. I'm looking at this loss as tuition for my investment education. I just hope my wife sees it that way.

bberris
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by bberris » Mon Sep 23, 2019 4:58 pm

Don't be lulled into a false sense of security by the financial condition of the insurance company backing the fund. The insurance covering losses is normally voided by contract when a fund is terminated due to liquidation or merger of the employee's company. I don't know of any case where the loss was caused by insolvency of the insurance company. Losses are due to terms of the contract.

Monster99
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Monster99 » Mon Sep 23, 2019 7:32 pm

Thanks for posting this - I have been using the stable value fund in my 401k as a substitute for bonds (bond choice in the plan is poor). May have to reevaluate this strategy.....

MishkaWorries
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by MishkaWorries » Mon Sep 23, 2019 7:54 pm

Good thread. I've been thinking of moving my intermediate bond fund monies to the AUL fixed interest/Stable Value fund paying a guaranteed 4%.

Is this the same thing as a Stable Value fund? Is there the same risk as the funds discussed here?

p.s. I really feel for OP. After this financial loss, a couple of months later he got hit with the 12/2018 market collapse. If he reinvested in s&p 500 fund he's probably hasn't made his SV loss back yet.
We plan. G-d laughs.

Northern Flicker
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Northern Flicker » Mon Sep 23, 2019 8:07 pm

bberris wrote:
Mon Sep 23, 2019 4:58 pm
Don't be lulled into a false sense of security by the financial condition of the insurance company backing the fund. The insurance covering losses is normally voided by contract when a fund is terminated due to liquidation or merger of the employee's company. I don't know of any case where the loss was caused by insolvency of the insurance company. Losses are due to terms of the contract.
Not completely correct. The contract usually states events under which the insurer can process withdrawals at the market value of the underlying portfolio. It is losses in the underlying portfolio that drive losses incurred by the SVF investor.

Stable value funds can be good investments. You have to exercise due diligence to ensure the underlying portfolio is something that you would be willing to hold if it were, say the portfolio of a bond fund, and that the fees charged are reasonable. It may not be easy to get that information, but that is what is needed to vet the investment.

I hold a SVF with low fees and that invests in high quality corporate bonds and commercial mortgages. By combining that with an intermediate treasury fund, the combined tail risk is similar to a bond index fund. If credit markets sustain losses, that part of a bond index will as well.

I believe the OP was using it as a cash investment at a time when triggering events were invoked. They are not a cash-equivalent. They are a bond fund where an insurer absorbs term and credit exposure almost, but not all of the time.
Index fund investor since 1987.

TBillT
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by TBillT » Tue Sep 24, 2019 8:31 am

Although stable value funds and probably money market funds can lose money, it is rare except in extreme market situations like 2008.
It would probably be big news to "break the bank". So I am not sure excatly what is going in these cases, but if it is a terrible fund gone bust we probably ought to be able read about in the news somewhere.

I used to have quite a bit in SVF's and I do recall some quarters when performance was zero. So at that point I rolled over to FiDo, several years ago.

Keep in mind I think SVF's sometimes have loan provisions so the income or default of those is part of the fund income.

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dm200
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by dm200 » Tue Sep 24, 2019 10:33 am

It has been a long time since I had an employer plan that offered a stable value option. As I recall, there were some restrictions on moving money in and out of the Stable Value fund.

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Nate79
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Nate79 » Tue Sep 24, 2019 3:31 pm

The anecdotal stories of SVF losing money have almost always been due to an employer actions that they didn't think thru properly or don't care about their employees. When an employer is changing plans they usually have a freeze period where you can't transfer in/out. This would prevent these problems from happening if planned well in advance.

anonenigma
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by anonenigma » Tue Sep 24, 2019 3:58 pm

TBillT wrote:
Tue Sep 24, 2019 8:31 am
Although stable value funds and probably money market funds can lose money, it is rare except in extreme market situations like 2008.
It would probably be big news to "break the bank".
I believe the expression is "break the buck" - in which the value of a unit goes below $1.00.

frcabot
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by frcabot » Tue Sep 24, 2019 5:17 pm

OP, I'd strongly consider you to find a lawyer who specializes in securities litigation and specifically do a search for lawsuit stable value fund. There is probably a sizeable class and substantial damages here so I'm sure you could find some attorneys who would be interested. Seems like the employer may bear some responsibility as it was their decision to terminate the fund and thus incur the losses.

Edit: Never mind, I just saw this was a necro thread.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by frcabot » Tue Sep 24, 2019 5:35 pm

Sargon wrote:
Sat Sep 21, 2019 7:37 pm
This is my first post also and very similar to yours, just about a year later.
I had my wife's 401k fully invested in a Fixed Account/Stable Value/Money Market Fund because I was concerned about market volatility and wanted a safe place to park her money for awhile. When we first heard about her company being bought out, we decided to leave her money where it was while we figured out where we wanted to transfer the funds.
When her company was bought out by another firm, they terminated the 401k plan.
That is what triggered the loss in her account. The Book Value/Market Value difference that had to be made up using
Market Value Adjustments (MVA) by the Fund Administrator.
This was my first experience with a Stable Value Fund. Actually, up until a few days ago,I thought "stable" was just an adjective describing the fund
rather than an actual type of fund. I have been investing for over 30 years, but didn't know about this. Turns out there was a good reason. It is my understanding that these SV Funds are ONLY offered through employer's 401k plans. My wife's company began offering a 401k only a few years ago, so
I wasn't aware of SVF's.

Here are my thoughts on this investment vehicle:
1. I think by allowing the use of the word Money Market in the title they are intentionally misleading.
2. The fund is more like an annuity in that MVA's are used like surrender charges.
3. If you are invested in an SVF and find out that your company is about to terminate their 401k plan, transfer your money to another fund ASAP.
4. Make sure that you FULLY understand what you are investing in. I'm looking at this loss as tuition for my investment education. I just hope my wife sees it that way.
Indeed it is the termination of the SVF that creates the loss, as the book value must be reconciled with the market value (and GIC contracts are subject to surrender fees, etc.). When an SVF is terminated, it should be done over a period of time to protect investors and protect the stable value of the fund. See, e.g., https://stablevalue.org/media/misc/Stable_Value_FAQ.pdf
"In cases where a plan sponsor wishes to terminate its participation in a commingled stable value fund, a 12 month put or waiting period may be imposed to protect remaining investors by ensuring an orderly liquidation of the departing fund’s proportionate share of the stable value fund’s underlying assets. However, plan participants continue to transact at book/contract value."
The idea of a SVF is that the book value of a SVF is guaranteed by insurance contracts, hence why the NAV trades at book value and not at market value. When an SVF is terminated, however, those guarantees no longer apply.

Again, if you lost a substantial amount of money because your new employer terminated the 401k plan without considering the loss that would be incurred by its employees invested in the SVF, I would consider consulting with a securities attorney who specializes in SVF litigation. A brief search reveals that many SVF lawsuits alleging poor management have failed. The issue here though is not poor management of the funds themselves, but rather the unreasonable manner in which the SVFs were terminated by the employer.

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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by dbr » Wed Sep 25, 2019 8:37 am

I think it is very rare that a stable value fund holder ever actually loses money, but we have a case here. I have always wondered in talking about SV funds where the risk might be, and it has seemed that where it would be is in idiosyncratic factors. In this case the factor was the employer terminating the fund incompetently. But the problem is that these 401k SV funds always seem to be one-offs for the employer involved. At my employer the fund management of the SV fund was listed as "an executive committee of company management." I guess that means the faith you should have in them is the same as the faith you should have in the people who own your job.

So what we have is an offset of SV funds almost never costing people money but exposure to idiosyncratic risk. I have always taken the position of not putting more than 20% of my assets in such a fund.

NB: Since some time my company deleted the SV fund because they said the costs were too high. The money was transferred to a generic intermediate term bond fund. No one lost any money.

Northern Flicker
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by Northern Flicker » Wed Sep 25, 2019 3:57 pm

Different SVF’s are structured differently. Some have segregated assets so that the assets of one DC plan are not commingled with those of another. In other cases, the assets are commingled, and the DC plan is a de facto shareholder though I don’t think there is a formal concept of shares held of the commingled assets.

At first blush, the segregated structure seems safer since the funds in one DC plan are shielded from what is going on in another. But it turns out the opposite also can be true— when the assets are commingled it is more difficult to implement triggering events for processing withdrawals at market value.

But it is still more complex, because when the assets from SVF’s in different DC plans are commingled, they may be at a single insurance company which may be commingling the assets with the assets backing all sorts of other insurance products. This opens up the theoretical risk that losses in other insurance products that have nothing to do with SVFs could affect the market value of assets. This is more an issue if there is an insolvency of the insurance company and then the SVF’s and beneficiaries of other products all are making claims on the same residual assets.

Again, the due diligence for these is complex. Failures have been rare, but the crediting rate would have to be attractive for me to bother attempting the due diligence. Still, some do have attractive rates making them worth a close look.
Index fund investor since 1987.

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welderwannabe
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Re: Heavy Loss in Stable Value Fund of 401k investments

Post by welderwannabe » Fri Nov 08, 2019 6:15 pm

I wonder what the OP's retirement plan managers are thinking now. They terminated the SV and took a hair cut to chase performance in a rising rate environment. Now that rates are down again, this looked like a real stupid move.

Different situation than the recent poster where the SV was disolved due to a corporate purchase.
I am not an investment professional, but I did stay at a Holiday Inn Express last night.

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