Page 1 of 1

Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 9:46 am
by Chip Shot
Due to a change in my employment situation, I have the opportunity to move my money out of a 401K into my IRA at Vanguard.
My 401K has a guaranteed 3% account and 100% of my 401K money is in this account.

Here is my overall portfolio allocation:
Stocks - 41.5%
Bonds - 27%
Secure - (CD's, Cash, Guaranteed 3% account) - 31.5%

My question is should I move the 401K money (13% of my overall portfolio) into Total Bond, in my IRA, or just keep it in the 3% account?
There doesn't seem to be any strings attached to this 3% account. No fees that I see, and no withdrawal penalty.

I know that bond yields are very low, yet Total Bond has returned 7% this year. I assume this return is due to the corporate bond portion.

I am 3 yrs out from retirement. Any advice would surely be appreciated.

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 9:49 am
by Stinky
3% is an excellent rate in today’s environment. I’d leave the money in the 401(k). The larger gain in 2020 in TBM is due to interest rates coming down, and I don’t expect that 2021 will repeat 2020’s performance.

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 9:50 am
by cheese_breath
Who guarantees the 3%? If it's TIAA I'd leave it there. That's what I do.

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 9:53 am
by Iorek
My guess is that total bond has that return because interest rates have dropped this year, making existing bonds it holds at the older, higher rates more valuable.

If you think interest rates will continue to drop, and more broadly if you are comfortable with your bond component fluctuating in value as interest rates rise and fall then I would move to total bond but personally I would stick with the guaranteed 3% (if you trust the guarantee).

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 10:01 am
by dbr
Chip Shot wrote: Sun Dec 06, 2020 9:46 am

My question is should I move the 401K money (13% of my overall portfolio) into Total Bond, in my IRA, or just keep it in the 3% account?
There doesn't seem to be any strings attached to this 3% account. No fees that I see, and no withdrawal penalty.

You don't know the source of the guarantee of that 3%. That said for 13% of your assets in a legitimate 401k this kind of holding of assets is probably fine. I would leave it alone. I would not put all my wealth in such a holding.

I know that bond yields are very low, yet Total Bond has returned 7% this year. I assume this return is due to the corporate bond portion.

No, the return is due to increased NAV, capital gain, due to falling interest rates. If interest rates increase you will have losses rather than gains.


I am 3 yrs out from retirement. Any advice would surely be appreciated.

I don't think you have to worry about whether 13% of your assets are in the one fund or in total bond. There is no material effect between the one and the other. You do need to understand how that account has a 3% guarantee, though.

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 10:07 am
by MikeG62
Stinky wrote: Sun Dec 06, 2020 9:49 am 3% is an excellent rate in today’s environment. I’d leave the money in the 401(k). The larger gain in 2020 in TBM is due to interest rates coming down, and I don’t expect that 2021 will repeat 2020’s performance.
+1

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 10:21 am
by student
Personally, I use a guaranteed 3% account in TIAA for almost all of my fixed income allocation.

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 11:14 am
by Blister
I have an old 403b account that I considered moving to my IRA just for simplicity. With closer inspection I noted that it has a guaranteed 4.5% return. (like I said it is old) I decided to just let it be and include it as part of my bond allocation.

My suggestion would be to leave it in the 401k as long as it doesn't complicate your accounting.

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 11:20 am
by Escapevelocity
Nothing to add except damn I wish my 401k had a 3% stable value fund! I’ve got 500k sitting in a short term bond fund in my 401k yielding below half a percent.

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 1:13 pm
by Chip Shot
Thanks for the replies, everybody. This confirms my thinking. I will keep the money in the Stable Value fund.

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 1:39 pm
by chw
I would use the 3% stable value fund for your bond allocation. Perhaps you could amend your IPS to state you would revisit allocating $$$ to BND when the SEC yield rises above 2.5% (or some yield you prefer). I too, use my 501K stable value fund for the bulk of my bond allocation (and have amended my IPS as stated above).

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 1:45 pm
by anon_investor
Blister wrote: Sun Dec 06, 2020 11:14 am I have an old 403b account that I considered moving to my IRA just for simplicity. With closer inspection I noted that it has a guaranteed 4.5% return. (like I said it is old) I decided to just let it be and include it as part of my bond allocation.

My suggestion would be to leave it in the 401k as long as it doesn't complicate your accounting.
4.5%??? That is more than some junk bond funds pay...

Re: Total Bond vs Guaranteed 3% Account

Posted: Sun Dec 06, 2020 1:47 pm
by Outer Marker
I’m keeping my fixed income in stable value until BND is paying more than 3% sec yield for two consecutive quarters. Then I’ll think about moving some of it back. No point in taking interest rate risk to be earning less than stable value is paying.

Re: Total Bond vs Guaranteed 3% Account

Posted: Mon Dec 07, 2020 7:11 am
by avenger
I have all of my 457 invested in a stable value fund earning just under 3%.
I ran out of fixed income space there, so I’m buying vanguard intermediate term tax exempt in taxable.

Re: Total Bond vs Guaranteed 3% Account

Posted: Mon Dec 07, 2020 9:06 am
by usain5
One other consideration: I'd assume you can leave it in 401k in 3% stable value for now, and then later decide to move it to IRA, etc., if / when 3% fixed-income is no longer as attractive. The reverse is not true (ie, can't move it back to 401k).

In other words, you also have the monetary value of "optionality" with it remaining in your 401k.

Re: Total Bond vs Guaranteed 3% Account

Posted: Mon Dec 07, 2020 9:12 am
by MishkaWorries
Chip Shot wrote: Sun Dec 06, 2020 1:13 pm Thanks for the replies, everybody. This confirms my thinking. I will keep the money in the Stable Value fund.
I would only add to be sure you understand the withdraw rules of your stable value fund. For instance, my SV fund has a requirement that I can only withdraw 20% per year from the fund. Therefore, as I get closer to retirement I'll have to be sure I have a plan in place to get that money out when I need it.

Re: Total Bond vs Guaranteed 3% Account

Posted: Mon Dec 07, 2020 9:53 am
by cas
dbr wrote: Sun Dec 06, 2020 10:01 am You don't know the source of the guarantee of that 3%. That said for 13% of your assets in a legitimate 401k this kind of holding of assets is probably fine. I would leave it alone. I would not put all my wealth in such a holding.

[ . . . ]

I don't think you have to worry about whether 13% of your assets are in the one fund or in total bond. There is no material effect between the one and the other. You do need to understand how that account has a 3% guarantee, though.
I agree with dbr: it is probably fine, especially at 13% of your assets, but it would probably be worthwhile doing a bit of digging to understand a bit more about exactly what you own.

1. Is this some flavor of TIAA Traditional? If so, that is a topic of its own (plenty of posts on the forum), but a well known, widely held, and long established product.

2. If it isn't TIAA Trad you might want to do a bit of digging in the prospectus and the asset list of the most recent semi-annual/annual report and figure out
- exactly what the underlying assets are (basket of high quality bonds? something riskier?)
- where the guarantee is coming from (the single (insurance?) company administering the stable value fund? Guaranteed Interest Contracts (GICs) from multiple highly rated insurance companies?)
- rules/restrictions about what happens if either you or your 401(k) plan try to withdraw funds or change providers.

Again, everything is will probably be fine, and I have no intention of fear-mongering. But occasionally unpleasant things happen with stable value funds. (The linked boglehead's forum post is titled "Heavy Loss in Stable Value Fund of 401k investments". In the particular case of the original post in that thread, the loss seemed to result from the OP's employer deciding to switch one stable value provider for a different stable provider, which - under the original terms the employer had signed with the first stable value provider - caused the stable value guarantee to be voided. But the thread discusses other unpleasant (but rare) things that can happen with stable value funds.) This isn't a reason to avoid stable value funds (everything is fine, the vast majority of the time), but it is a reason to understand a bit more about where the "guarantee" is coming from and under what conditions it might be voided. Especially if the interest rate on the stable value fund seems awfully good.

Re: Total Bond vs Guaranteed 3% Account

Posted: Mon Dec 07, 2020 10:08 am
by runninginvestor
Chip Shot wrote: Sun Dec 06, 2020 9:46 am Due to a change in my employment situation, I have the opportunity to move my money out of a 401K into my IRA at Vanguard.
My 401K has a guaranteed 3% account and 100% of my 401K money is in this account.

Here is my overall portfolio allocation:
Stocks - 41.5%
Bonds - 27%
Secure - (CD's, Cash, Guaranteed 3% account) - 31.5%

My question is should I move the 401K money (13% of my overall portfolio) into Total Bond, in my IRA, or just keep it in the 3% account?
There doesn't seem to be any strings attached to this 3% account. No fees that I see, and no withdrawal penalty.

I know that bond yields are very low, yet Total Bond has returned 7% this year. I assume this return is due to the corporate bond portion.

I am 3 yrs out from retirement. Any advice would surely be appreciated.
Is the 3% for 2020 or confirmed for 2021? I ask because my spouse's 403b was 3% for 2020 but just updated their rate for 2021 to 2.55%.