"How Safe Are Stable Value Funds?"

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Taylor Larimore
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"How Safe Are Stable Value Funds?"

Post by Taylor Larimore »

Bogleheads:

I've never completely understood the risk of investing in Stable Value Funds. This article by Jon Luskin CFP provides helpful information. Bogleheads are mentioned.

https://jonluskin.com/how-safe-are-stable-value-funds/

Best wishes.
Taylor
Words of Wisdom by Jack Bogle: "Deep down, I remain absolutely confident that the vast majority of American families would be well served by owning their equity holdings in an all-U.S. stock-market index portfolio and holding their bonds in an all-U.S. bond-market index portfolio."
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like2read
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Re: "How Safe Are Stable Value Funds?"

Post by like2read »

"It’s a stable value fund and not a guaranteed value fund."

Good read, thanks Taylor.

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AnnetteLouisan
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Re: "How Safe Are Stable Value Funds?"

Post by AnnetteLouisan »

This is helpful. I have some stable value in my 401k (glad to see it’s on the article’s list of good ones) but I haven’t been purchasing additional shares of it since 1/1/22. Now it’s sll going into S&P 500 and a little exUS (although I may stop that since it is a broad based total exUS fund).

Thank you Taylor!

Happy Independence Day!

Fondly,
Annette

Ps: very fitting Bogle quote for the holiday weekend!
Last edited by AnnetteLouisan on Sun Jul 03, 2022 7:47 pm, edited 3 times in total.
Kinkajou82
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Re: "How Safe Are Stable Value Funds?"

Post by Kinkajou82 »

Thank you! I've been puzzled by these as well.

So it sounds like whereas stable funds are insured against low returns, that risk is replaced by increased expenses (to buy said insurance) and the risk of an insurancr company failing and not providing the promised replacement payments?

Hmmm... so does market risk still exist technically? It's just that because of the minimum guarantee removing interest rate risk, the price per share for a stable value fund isn't expected to go up or down drastically?
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Re: "How Safe Are Stable Value Funds?"

Post by RRJeff »

Thanks for the link to the article. I noticed Prudential is listed as an example of a “bad” stable value fund due to hidden fees. My 401k was with Prudential (since taken over by Empower). The stable value fund fee is listed as “NA”. Is it possible to find out what the hidden fees are? How would I do that?
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Re: "How Safe Are Stable Value Funds?"

Post by KeepGrowing »

I have a small amount of money in TIAA Traditional, which is also listed in the article as one of the "bad" companies for stable value funds. Anecdotally, I have always found the crediting rate indicated on the website for my account to accurately reflect the rate at which the balance increases. The article would be much improved by explaining exactly how Mr. Tobe CFA decided that each fund named is a "bad one" (which tends to be a red flag for oversimplification).
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Re: "How Safe Are Stable Value Funds?"

Post by anon_investor »

My megacorp 401k plan has a stable value fund that is insured by 2 separate highly rated giant insurance companies. I would feel comfortable using it because the risk is spread out over 2 highly rated giant insurance companies (not just 1).
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Re: "How Safe Are Stable Value Funds?"

Post by Stinky »

RRJeff wrote: Sun Jul 03, 2022 7:29 pm Thanks for the link to the article. I noticed Prudential is listed as an example of a “bad” stable value fund due to hidden fees. My 401k was with Prudential (since taken over by Empower). The stable value fund fee is listed as “NA”. Is it possible to find out what the hidden fees are? How would I do that?
Excellent article, Taylor. Thanks for the link.

As to the fees embedded in the stable value fund - I’m not sure what would be gained by knowing the level of “hidden” fees.

What really counts with a stable value fund is the net credited rate, and the likelihood that the insurance company(ies) standing behind the fund will be there if needed to backstop the fund.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: "How Safe Are Stable Value Funds?"

Post by anon_investor »

Stinky wrote: Sun Jul 03, 2022 8:04 pm
RRJeff wrote: Sun Jul 03, 2022 7:29 pm Thanks for the link to the article. I noticed Prudential is listed as an example of a “bad” stable value fund due to hidden fees. My 401k was with Prudential (since taken over by Empower). The stable value fund fee is listed as “NA”. Is it possible to find out what the hidden fees are? How would I do that?
Excellent article, Taylor. Thanks for the link.

As to the fees embedded in the stable value fund - I’m not sure what would be gained by knowing the level of “hidden” fees.

What really counts with a stable value fund is the net credited rate, and the likelihood that the insurance company(ies) standing behind the fund will be there if needed to backstop the fund.
Are there any recent examples of major stable value fund failures?
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Re: "How Safe Are Stable Value Funds?"

Post by Kenkat »

He spends a lot of time talking about costs, but the quoted interest rate the stable value fund pays is net of that cost, so there is no “hidden” cost. If the stable value fund says you are getting 2%, that’s what you get. It’s not 2% minus some fee. It’s 2%.

He also says stable value funds purchase insurance from insurance companies. While that may occur in some situations, many stable value funds are provided directly by the insurance company itself. The insurance company backs the stable value fund and pays interest and in turn invests the money in its general surplus investment account. All insurance companies will maintain an investment portfolio to account for future obligations. You pay premiums and those are invested so that when your time on this great green earth is at an end, they can pay your beneficiaries what was promised,

A solvent company will always have a surplus or excess amount over their future liabilities. Generally, higher surplus = higher ratings. These investment accounts have a very long time horizon so they tend to be a lot of long term bonds purchased over many years. The rate provided will move pretty slowly up or down due to this long horizon; it is only modestly affected by short term changes in rates.
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Re: "How Safe Are Stable Value Funds?"

Post by student »

Kenkat wrote: Sun Jul 03, 2022 9:17 pm He spends a lot of time talking about costs, but the quoted interest rate the stable value fund pays is net of that cost, so there is no “hidden” cost. If the stable value fund says you are getting 2%, that’s what you get. It’s not 2% minus some fee. It’s 2%.

He also says stable value funds purchase insurance from insurance companies. While that may occur in some situations, many stable value funds are provided directly by the insurance company itself. The insurance company backs the stable value fund and pays interest and in turn invests the money in its general surplus investment account. All insurance companies will maintain an investment portfolio to account for future obligations. You pay premiums and those are invested so that when your time on this great green earth is at an end, they can pay your beneficiaries what was promised,

A solvent company will always have a surplus or excess amount over their future liabilities. Generally, higher surplus = higher ratings. These investment accounts have a very long time horizon so they tend to be a lot of long term bonds purchased over many years. The rate provided will move pretty slowly up or down due to this long horizon; it is only modestly affected by short term changes in rates.
I agree with what you said. This particular point from the article is completely bogus in my view.
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Re: "How Safe Are Stable Value Funds?"

Post by student »

KeepGrowing wrote: Sun Jul 03, 2022 7:56 pm I have a small amount of money in TIAA Traditional, which is also listed in the article as one of the "bad" companies for stable value funds. Anecdotally, I have always found the crediting rate indicated on the website for my account to accurately reflect the rate at which the balance increases. The article would be much improved by explaining exactly how Mr. Tobe CFA decided that each fund named is a "bad one" (which tends to be a red flag for oversimplification).
This just tells me that either Mr. Tobe has a hidden agenda or is not very good at explaining. I use TIAA Traditional almost exclusively as my fixed income. My experience is the same as yours.
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Re: "How Safe Are Stable Value Funds?"

Post by Call_Me_Op »

I notice that TIAA has a TIAA Stable Value Fund and a TIAA Traditional Annuity. Can someone explain the difference - and why they need both?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: "How Safe Are Stable Value Funds?"

Post by student »

Call_Me_Op wrote: Mon Jul 04, 2022 8:05 am I notice that TIAA has a TIAA Stable Value Fund and a TIAA Traditional Annuity. Can someone explain the difference - and why they need both?
TIAA Traditional is an older (perhaps more complicated) product with a vintage system and it comes with illiquid and liquid versions. TIAA Stable Value Annuity (I assume this is what you are referring to) is a newer product without the vintage system and it is liquid.
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Re: "How Safe Are Stable Value Funds?"

Post by Call_Me_Op »

student wrote: Mon Jul 04, 2022 8:24 am
Call_Me_Op wrote: Mon Jul 04, 2022 8:05 am I notice that TIAA has a TIAA Stable Value Fund and a TIAA Traditional Annuity. Can someone explain the difference - and why they need both?
TIAA Traditional is an older (perhaps more complicated) product with a vintage system and it comes with illiquid and liquid versions. TIAA Stable Value Annuity (I assume this is what you are referring to) is a newer product without the vintage system and it is liquid.
I am receiving 5% interest with the older product (which I have held for nearly 40 years) - I believe the newer one is quite a bit lower. I always felt it is a fine product, so I do not understand why the author of the referenced article was negative on it. In fact, it is not clear whether the author was referring to the older TIAA product, the newer one, or both.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
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Re: "How Safe Are Stable Value Funds?"

Post by student »

Call_Me_Op wrote: Mon Jul 04, 2022 8:25 am
student wrote: Mon Jul 04, 2022 8:24 am
Call_Me_Op wrote: Mon Jul 04, 2022 8:05 am I notice that TIAA has a TIAA Stable Value Fund and a TIAA Traditional Annuity. Can someone explain the difference - and why they need both?
TIAA Traditional is an older (perhaps more complicated) product with a vintage system and it comes with illiquid and liquid versions. TIAA Stable Value Annuity (I assume this is what you are referring to) is a newer product without the vintage system and it is liquid.
I am receiving 5% interest with the older product (which I have held for nearly 40 years) - I believe the newer one is quite a bit lower. I always felt it is a fine product, so I do not understand why the author of the referenced article was negative on it.
I cannot find the performance of stable value on its website. So I guess here are the different versions.
1) TIAA Traditional (G)RA: Minimum 3%, illiquid, vintage system, usually higher crediting rate than the corresponding liquid version. Currently 5.25% for new money.
2) TIAA Traditional (S)(G)RA: Minimum 3%, liquid, vintage system. Currently 4.5% for new money.
3) TIAA Traditional RC: Minimum 1%, illiquid, vintage system, usually the highest crediting rate. Currently 5.75% for new money.
4) TIAA Traditional RC Plus: Minimum 1%, liquid, vintage system, usually higher crediting rate than 2). Currently 4.75% for new money.
5) TIAA Stable Value: Minimum 1% (?), non vintage system.

I have the same opinion as you regarding TIAA Traditional. The author of the article gave no justifications. I wonder whether he actually understands what TIAA is offering.
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Re: "How Safe Are Stable Value Funds?"

Post by Count If »

From the article, stable value funds are "generally safe from decreases in price regardless of interest rates or stock market panics". My mega-corp 401Ks both use the same stable value fund (the 'rams horn' company) that currently earns a steady 1.9% on a calendar-day basis. To me it's all about capital preservation within the 401. The extreme volatility/downtrend in both stock and bond funds in the first half of 2022 made it my go-to choice to partially counter negative mega-trends in both stock and bond markets. It's a valuable risk management tool that's unique to 401Ks. I am guessing, that the interest rate will increase on a lagging basis versus bonds because of insurance contract backing.
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Re: "How Safe Are Stable Value Funds?"

Post by student »

Count If wrote: Mon Jul 04, 2022 10:30 am From the article, stable value funds are "generally safe from decreases in price regardless of interest rates or stock market panics". My mega-corp 401Ks both use the same stable value fund (the 'rams horn' company) that currently earns a steady 1.9% on a calendar-day basis. To me it's all about capital preservation within the 401. The extreme volatility/downtrend in both stock and bond funds in the first half of 2022 made it my go-to choice to partially counter negative mega-trends in both stock and bond markets. It's a valuable risk management tool that's unique to 401Ks. I am guessing, that the interest rate will increase on a lagging basis versus bonds because of insurance contract backing.
My take is for stable value fund (at least for TIAA traditional) is that in the long run, it will slightly lag Total Bond but it smooths out the curve, which is what I want.
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Re: "How Safe Are Stable Value Funds?"

Post by dbr »

I don't know how to evaluate idiosyncratic risk in contracts that are between a single 401k plan and some insurance companies. On the grounds that there must somehow be some, one might suggest not putting the majority of one's portfolio in one.

No, actual instances of failed stable value funds seem to be few and far between if there are any. I have heard there can be restrictions on getting all your money out on demand, but here was never any such issue in my 401k funds. For me personally I don't have a use for that type fund these days, but some investors might.
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Re: "How Safe Are Stable Value Funds?"

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Count If wrote: Mon Jul 04, 2022 10:30 am From the article, stable value funds are "generally safe from decreases in price regardless of interest rates or stock market panics". My mega-corp 401Ks both use the same stable value fund (the 'rams horn' company) that currently earns a steady 1.9% on a calendar-day basis. To me it's all about capital preservation within the 401. The extreme volatility/downtrend in both stock and bond funds in the first half of 2022 made it my go-to choice to partially counter negative mega-trends in both stock and bond markets. It's a valuable risk management tool that's unique to 401Ks. I am guessing, that the interest rate will increase on a lagging basis versus bonds because of insurance contract backing.
I'm also in T Rowe Price's Stable Value Fund. I've heard of better ones out there, but it's nice that they were on the articles list of better SVFs.
My companies 401k doesn't have much for fixed income options. Most of my stock and risky portfolio I have in rollover IRA from a prior 401k, and I want this current 401k to be mostly low-risk low-duration fixed income. Unfortunately there is no money market or short-term bond options in the plan. My options are the Stable Value fund, Vanguard's Total Bond institutional class, some active bond fund that targets trying to beat the Barclay's Bond Aggregate Index (with similarly long duration), or a multi-asset strategic fund that targets actively trying to beat global inflation.
The only thing that really suits my preferences would be the SVF and maybe a mixture of the SVF with Total Bond Index, but the SVF prohibits trading or "rebalancing" between the SVF and other bond funds, and without a money market or short-term bond fund option, my only real choice is using the SVF for better or worse :annoyed but it has been pretty good relative to bond funds during the recent interest rate hikes ;)
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Re: "How Safe Are Stable Value Funds?"

Post by crefwatch »

Call_Me_Op wrote: Mon Jul 04, 2022 8:05 am I notice that TIAA has a TIAA Stable Value Fund and a TIAA Traditional Annuity. Can someone explain the difference - and why they need both?
Note that TIAA has a lot of different products for different customers. They have annuity products with very high costs, and annuity products with very low costs. It's typically your employer's contract, and the structure (403(b) for example) of the account that makes the difference.

I think that many people spend too much time decrying the withdrawal restrictions on the highest-yielding TIAA Traditional accounts (read that clause again; There's a connection between higher yield and longer-term investments ... ) and not enough time "worrying" about the fact that TIAA Traditional is not a fractional-ownership product, as are Mutual Funds and Variable Annuities.

Now, because of their 100-year record, and my almost 50-year experience, I personally don't worry about either of those issues. But I just don't have a problem with tying my most conservative asset-category retirement funds up for eight to ten years. And I can do my proportional RMDs from it without any special planning. Besides, for most of my life, the money that's been in TIAA Traditional the longest is usually the Vintage that is close to the highest payoug. (Of course that's less true during a period of sharp changes in prevailing interest rate.) It has virtually "always" been the category with the highest Payout percentage when annuitizing. (I acknowledge that not everyone annuitizes.)

But a Stable Value Fund provides a product for people who want a more familiar and more liquid structure to their more conservative asset category. Is it safer than a contract with an insurance company that simply promises what they will do for you? Your call.
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Re: "How Safe Are Stable Value Funds?"

Post by markcoop »

I also have had lots of questions about Stable Value Funds. Although a SV fund shields you from some interest rate risks, I always thought those risks are still present. For example, the interest rate on my company's SV has changed over time in response to overall interest rates. The magnitude of the change is not the same, there is a floor (and probably a ceiling) to rates changes and there is always a lag to the change. At least, that has been my understanding. In fact, it is the lag that makes me concerned going forward. My SV fund did great that past few years when interest rates were low because, I assumed, many of those insurance contracts were written when rates were higher. I would think now many of those contracts have been replaced with contracts when rates were much lower. So, my question is how SV funds will perform in a period of rising interest rates? As I said, I am a novice with understanding SV funds, so please correct me if I said something wrong.
Last edited by markcoop on Mon Jul 04, 2022 11:44 am, edited 1 time in total.
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Re: "How Safe Are Stable Value Funds?"

Post by Corsair »

student wrote: Mon Jul 04, 2022 10:35 am
Count If wrote: Mon Jul 04, 2022 10:30 am From the article, stable value funds are "generally safe from decreases in price regardless of interest rates or stock market panics". My mega-corp 401Ks both use the same stable value fund (the 'rams horn' company) that currently earns a steady 1.9% on a calendar-day basis. To me it's all about capital preservation within the 401. The extreme volatility/downtrend in both stock and bond funds in the first half of 2022 made it my go-to choice to partially counter negative mega-trends in both stock and bond markets. It's a valuable risk management tool that's unique to 401Ks. I am guessing, that the interest rate will increase on a lagging basis versus bonds because of insurance contract backing.
My take is for stable value fund (at least for TIAA traditional) is that in the long run, it will slightly lag Total Bond but it smooths out the curve, which is what I want.
Our 401K stable value (non-TIAA) has beat FXNAX (US Bond Market Index) on YTD, 1 Yr, 3 Yr, 5 YR, and 10 Yr annual return basis as of 6/30/22.

Similar to others we have limited choices so between Stable Value and FXNAX we picked Stable Value.
All posts are my own opinions and are not financial advice.
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Re: "How Safe Are Stable Value Funds?"

Post by dbr »

markcoop wrote: Mon Jul 04, 2022 11:36 am I also have had lots of questions about Stable Value Funds. Although a SV fund shields you from some interest rate risks, I always thought those risks are still present. For example, the interest rate on my company's SV has changed over time in response to overall interest rates. The magnitude of the change is not the same, there is a floor (and probably a ceiling) to rates changes and there is always a lag to the change. At least, that has been my understanding. If fact, it is the lag that makes me concerned going forward. My SV fund did great that past few years when interest rates were low because, I assumed, many of those insurance contracts were written when rates were higher. I would think now many of those contracts have been replaced with contracts when rates were much lower. So, my question is how SV funds will perform in a period of rising interest rates? As I said, I am a novice with understanding SV funds, so please correct me if I said something wrong.

My understanding of SV funds is that generally the interest rate tends to lag current rates by awhile, maybe a year, both going up and going down.

This is all true. The financial definition of risk is variability of returns. That means that fixed principal investments that have variable interest rates are risky to the extent the interest rate varies. There is a distinction that I don't think an SV fund ever posts at negative interest rate. But if you change the conversation to real rates SV funds certainly can pay negative rates. I bonds never pay negative real rates but they are very risky in nominal terms with interest varying unpredictably between maybe 2% and 10% right now. Not many fixed income investments are that variable in nominal terms although CDs declined over a few years from around 5% to only 1%.
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Re: "How Safe Are Stable Value Funds?"

Post by student »

Corsair wrote: Mon Jul 04, 2022 11:42 am
student wrote: Mon Jul 04, 2022 10:35 am
Count If wrote: Mon Jul 04, 2022 10:30 am From the article, stable value funds are "generally safe from decreases in price regardless of interest rates or stock market panics". My mega-corp 401Ks both use the same stable value fund (the 'rams horn' company) that currently earns a steady 1.9% on a calendar-day basis. To me it's all about capital preservation within the 401. The extreme volatility/downtrend in both stock and bond funds in the first half of 2022 made it my go-to choice to partially counter negative mega-trends in both stock and bond markets. It's a valuable risk management tool that's unique to 401Ks. I am guessing, that the interest rate will increase on a lagging basis versus bonds because of insurance contract backing.
My take is for stable value fund (at least for TIAA traditional) is that in the long run, it will slightly lag Total Bond but it smooths out the curve, which is what I want.
Our 401K stable value (non-TIAA) has beat FXNAX (US Bond Market Index) on YTD, 1 Yr, 3 Yr, 5 YR, and 10 Yr annual return basis as of 6/30/22.

Similar to others we have limited choices so between Stable Value and FXNAX we picked Stable Value.
In the past 10 years, interest rate is low so it is a bonus. I would be satisfied if the future behaves like http://collegeretirement.blogspot.com/2 ... -deal.html
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Re: "How Safe Are Stable Value Funds?"

Post by suemarkp »

It seemed to me the author had a bias against stable value funds. In addition to the other items mentioned above, the author said you can't tax loss harvest with a SVF. Since SVFs are typically only in 401K's, you can't tax loss harvest anything in a 401K or IRA so why even bring it up?

If you have access to a SVF you need to measure it on its own merits as they are all different. Mine has no withdraw limits so I could pull it all out tomorrow if I wanted to. My crediting rate isn't as high as I'd like, but its the only thing in my 401K that has remained positive this year. The drediting rate dos change daily instead of quarterly like many others. However, the rate went up this month compared to the previous 6 months or so, so it is responding more quickly to rate rises than perhaps some others would. I moved about 80% of my 401K into the SVF 5 years ago in preparation for retirement. I wanted to preserve what I had, but new contributions after that went into the S&P 500.

I have a choice of only two bond funds, one US and one International, in my 401K. Since its a 401K collective item, there is no ticker and no SEC yield for them. My bond portion of my 401K is all in stable value right now. It will probably stay there until the US bond fund starts showing an annual return that is 1% above what the SVF is doing. Then maybe I'll move about half of my SVF into the bond fund. Maybe some 401K's give you a lot of fund choices, but mine is rather limited unless you want a target date fund.
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Re: "How Safe Are Stable Value Funds?"

Post by anon_investor »

suemarkp wrote: Mon Jul 04, 2022 1:27 pm It seemed to me the author had a bias against stable value funds. In addition to the other items mentioned above, the author said you can't tax loss harvest with a SVF. Since SVFs are typically only in 401K's, you can't tax loss harvest anything in a 401K or IRA so why even bring it up?

If you have access to a SVF you need to measure it on its own merits as they are all different. Mine has no withdraw limits so I could pull it all out tomorrow if I wanted to. My crediting rate isn't as high as I'd like, but its the only thing in my 401K that has remained positive this year. The drediting rate dos change daily instead of quarterly like many others. However, the rate went up this month compared to the previous 6 months or so, so it is responding more quickly to rate rises than perhaps some others would. I moved about 80% of my 401K into the SVF 5 years ago in preparation for retirement. I wanted to preserve what I had, but new contributions after that went into the S&P 500.

I have a choice of only two bond funds, one US and one International, in my 401K. Since its a 401K collective item, there is no ticker and no SEC yield for them. My bond portion of my 401K is all in stable value right now. It will probably stay there until the US bond fund starts showing an annual return that is 1% above what the SVF is doing. Then maybe I'll move about half of my SVF into the bond fund. Maybe some 401K's give you a lot of fund choices, but mine is rather limited unless you want a target date fund.
Yeah, every SVF is different. My current megacorp 401k's SVF guarantees the rate for a quarter and then resets. So it is almost like a 3 month CD.
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Re: "How Safe Are Stable Value Funds?"

Post by dbr »

anon_investor wrote: Mon Jul 04, 2022 1:51 pm
suemarkp wrote: Mon Jul 04, 2022 1:27 pm It seemed to me the author had a bias against stable value funds. In addition to the other items mentioned above, the author said you can't tax loss harvest with a SVF. Since SVFs are typically only in 401K's, you can't tax loss harvest anything in a 401K or IRA so why even bring it up?

If you have access to a SVF you need to measure it on its own merits as they are all different. Mine has no withdraw limits so I could pull it all out tomorrow if I wanted to. My crediting rate isn't as high as I'd like, but its the only thing in my 401K that has remained positive this year. The drediting rate dos change daily instead of quarterly like many others. However, the rate went up this month compared to the previous 6 months or so, so it is responding more quickly to rate rises than perhaps some others would. I moved about 80% of my 401K into the SVF 5 years ago in preparation for retirement. I wanted to preserve what I had, but new contributions after that went into the S&P 500.

I have a choice of only two bond funds, one US and one International, in my 401K. Since its a 401K collective item, there is no ticker and no SEC yield for them. My bond portion of my 401K is all in stable value right now. It will probably stay there until the US bond fund starts showing an annual return that is 1% above what the SVF is doing. Then maybe I'll move about half of my SVF into the bond fund. Maybe some 401K's give you a lot of fund choices, but mine is rather limited unless you want a target date fund.
Yeah, every SVF is different. My current megacorp 401k's SVF guarantees the rate for a quarter and then resets. So it is almost like a 3 month CD.
In don't think that is far off. Both have what in practice is a pretty safe guarantee that the fund value will be kept. Both commit to an interest rate for a time. Both may very well change the interest rate after that time. The interest rate paid is probably not a lot greater for the one than the other, though the SV might tend to yield more than a three month CD on average, or maybe not.

I would say CDs and SV funds have always been regarded as useful fixed income instruments in portfolios.
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Re: "How Safe Are Stable Value Funds?"

Post by bberris »

anon_investor wrote: Sun Jul 03, 2022 8:07 pm
Stinky wrote: Sun Jul 03, 2022 8:04 pm
RRJeff wrote: Sun Jul 03, 2022 7:29 pm Thanks for the link to the article. I noticed Prudential is listed as an example of a “bad” stable value fund due to hidden fees. My 401k was with Prudential (since taken over by Empower). The stable value fund fee is listed as “NA”. Is it possible to find out what the hidden fees are? How would I do that?
Excellent article, Taylor. Thanks for the link.

As to the fees embedded in the stable value fund - I’m not sure what would be gained by knowing the level of “hidden” fees.

What really counts with a stable value fund is the net credited rate, and the likelihood that the insurance company(ies) standing behind the fund will be there if needed to backstop the fund.
Are there any recent examples of major stable value fund failures?
Here is one from 2018, loss of about 5 %.

viewtopic.php?t=261726

Note that losses are most likely due to a change in sponsorship of the plan, not from failure of the insurance company backing the SVF. Insurance companies are much more stable than SVFs. The insurance contract voids the backing when mass withdrawals or liquidation happens because of a change in control of the 401k.
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Re: "How Safe Are Stable Value Funds?"

Post by anon_investor »

dbr wrote: Mon Jul 04, 2022 1:59 pm
anon_investor wrote: Mon Jul 04, 2022 1:51 pm
suemarkp wrote: Mon Jul 04, 2022 1:27 pm It seemed to me the author had a bias against stable value funds. In addition to the other items mentioned above, the author said you can't tax loss harvest with a SVF. Since SVFs are typically only in 401K's, you can't tax loss harvest anything in a 401K or IRA so why even bring it up?

If you have access to a SVF you need to measure it on its own merits as they are all different. Mine has no withdraw limits so I could pull it all out tomorrow if I wanted to. My crediting rate isn't as high as I'd like, but its the only thing in my 401K that has remained positive this year. The drediting rate dos change daily instead of quarterly like many others. However, the rate went up this month compared to the previous 6 months or so, so it is responding more quickly to rate rises than perhaps some others would. I moved about 80% of my 401K into the SVF 5 years ago in preparation for retirement. I wanted to preserve what I had, but new contributions after that went into the S&P 500.

I have a choice of only two bond funds, one US and one International, in my 401K. Since its a 401K collective item, there is no ticker and no SEC yield for them. My bond portion of my 401K is all in stable value right now. It will probably stay there until the US bond fund starts showing an annual return that is 1% above what the SVF is doing. Then maybe I'll move about half of my SVF into the bond fund. Maybe some 401K's give you a lot of fund choices, but mine is rather limited unless you want a target date fund.
Yeah, every SVF is different. My current megacorp 401k's SVF guarantees the rate for a quarter and then resets. So it is almost like a 3 month CD.
In don't think that is far off. Both have what in practice is a pretty safe guarantee that the fund value will be kept. Both commit to an interest rate for a time. Both may very well change the interest rate after that time. The interest rate paid is probably not a lot greater for the one than the other, though the SV might tend to yield more than a three month CD on average, or maybe not.

I would say CDs and SV funds have always been regarded as useful fixed income instruments in portfolios.
Well my SVF has offered superior rates than 3 mo CDs. It offers a guaranteed rate for the quarter.
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Re: "How Safe Are Stable Value Funds?"

Post by dbr »

anon_investor wrote: Mon Jul 04, 2022 2:01 pm
dbr wrote: Mon Jul 04, 2022 1:59 pm
anon_investor wrote: Mon Jul 04, 2022 1:51 pm
suemarkp wrote: Mon Jul 04, 2022 1:27 pm It seemed to me the author had a bias against stable value funds. In addition to the other items mentioned above, the author said you can't tax loss harvest with a SVF. Since SVFs are typically only in 401K's, you can't tax loss harvest anything in a 401K or IRA so why even bring it up?

If you have access to a SVF you need to measure it on its own merits as they are all different. Mine has no withdraw limits so I could pull it all out tomorrow if I wanted to. My crediting rate isn't as high as I'd like, but its the only thing in my 401K that has remained positive this year. The drediting rate dos change daily instead of quarterly like many others. However, the rate went up this month compared to the previous 6 months or so, so it is responding more quickly to rate rises than perhaps some others would. I moved about 80% of my 401K into the SVF 5 years ago in preparation for retirement. I wanted to preserve what I had, but new contributions after that went into the S&P 500.

I have a choice of only two bond funds, one US and one International, in my 401K. Since its a 401K collective item, there is no ticker and no SEC yield for them. My bond portion of my 401K is all in stable value right now. It will probably stay there until the US bond fund starts showing an annual return that is 1% above what the SVF is doing. Then maybe I'll move about half of my SVF into the bond fund. Maybe some 401K's give you a lot of fund choices, but mine is rather limited unless you want a target date fund.
Yeah, every SVF is different. My current megacorp 401k's SVF guarantees the rate for a quarter and then resets. So it is almost like a 3 month CD.
In don't think that is far off. Both have what in practice is a pretty safe guarantee that the fund value will be kept. Both commit to an interest rate for a time. Both may very well change the interest rate after that time. The interest rate paid is probably not a lot greater for the one than the other, though the SV might tend to yield more than a three month CD on average, or maybe not.

I would say CDs and SV funds have always been regarded as useful fixed income instruments in portfolios.
Well my SVF has offered superior rates than 3 mo CDs. It offers a guaranteed rate for the quarter.
A person might find that a longer CD would do better as CD yields do tend to rise with term and rate is guaranteed for longer. But probably most of the time SV yield is decent, taking account of lagging trends.

But then I once made out like a bandit on 10 year CDs paying 10% after the peak of 1970's inflation.
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Re: "How Safe Are Stable Value Funds?"

Post by anon_investor »

dbr wrote: Mon Jul 04, 2022 2:05 pm
anon_investor wrote: Mon Jul 04, 2022 2:01 pm
dbr wrote: Mon Jul 04, 2022 1:59 pm
anon_investor wrote: Mon Jul 04, 2022 1:51 pm
suemarkp wrote: Mon Jul 04, 2022 1:27 pm It seemed to me the author had a bias against stable value funds. In addition to the other items mentioned above, the author said you can't tax loss harvest with a SVF. Since SVFs are typically only in 401K's, you can't tax loss harvest anything in a 401K or IRA so why even bring it up?

If you have access to a SVF you need to measure it on its own merits as they are all different. Mine has no withdraw limits so I could pull it all out tomorrow if I wanted to. My crediting rate isn't as high as I'd like, but its the only thing in my 401K that has remained positive this year. The drediting rate dos change daily instead of quarterly like many others. However, the rate went up this month compared to the previous 6 months or so, so it is responding more quickly to rate rises than perhaps some others would. I moved about 80% of my 401K into the SVF 5 years ago in preparation for retirement. I wanted to preserve what I had, but new contributions after that went into the S&P 500.

I have a choice of only two bond funds, one US and one International, in my 401K. Since its a 401K collective item, there is no ticker and no SEC yield for them. My bond portion of my 401K is all in stable value right now. It will probably stay there until the US bond fund starts showing an annual return that is 1% above what the SVF is doing. Then maybe I'll move about half of my SVF into the bond fund. Maybe some 401K's give you a lot of fund choices, but mine is rather limited unless you want a target date fund.
Yeah, every SVF is different. My current megacorp 401k's SVF guarantees the rate for a quarter and then resets. So it is almost like a 3 month CD.
In don't think that is far off. Both have what in practice is a pretty safe guarantee that the fund value will be kept. Both commit to an interest rate for a time. Both may very well change the interest rate after that time. The interest rate paid is probably not a lot greater for the one than the other, though the SV might tend to yield more than a three month CD on average, or maybe not.

I would say CDs and SV funds have always been regarded as useful fixed income instruments in portfolios.
Well my SVF has offered superior rates than 3 mo CDs. It offers a guaranteed rate for the quarter.
A person might find that a longer CD would do better as CD yields do tend to rise with term and rate is guaranteed for longer. But probably most of the time SV yield is decent, taking account of lagging trends.

But then I once made out like a bandit on 10 year CDs paying 10% after the peak of 1970's inflation.
Did they have 30yr treasuries back then? :shock:
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Re: "How Safe Are Stable Value Funds?"

Post by dbr »

anon_investor wrote: Mon Jul 04, 2022 2:09 pm
dbr wrote: Mon Jul 04, 2022 2:05 pm
anon_investor wrote: Mon Jul 04, 2022 2:01 pm
dbr wrote: Mon Jul 04, 2022 1:59 pm
anon_investor wrote: Mon Jul 04, 2022 1:51 pm

Yeah, every SVF is different. My current megacorp 401k's SVF guarantees the rate for a quarter and then resets. So it is almost like a 3 month CD.
In don't think that is far off. Both have what in practice is a pretty safe guarantee that the fund value will be kept. Both commit to an interest rate for a time. Both may very well change the interest rate after that time. The interest rate paid is probably not a lot greater for the one than the other, though the SV might tend to yield more than a three month CD on average, or maybe not.

I would say CDs and SV funds have always been regarded as useful fixed income instruments in portfolios.
Well my SVF has offered superior rates than 3 mo CDs. It offers a guaranteed rate for the quarter.
A person might find that a longer CD would do better as CD yields do tend to rise with term and rate is guaranteed for longer. But probably most of the time SV yield is decent, taking account of lagging trends.

But then I once made out like a bandit on 10 year CDs paying 10% after the peak of 1970's inflation.
Did they have 30yr treasuries back then? :shock:
There was a hiatus at some point but I imagine 20 year was there all along. The problem is to benefit you have to have a lot of money, you have to understand inflation is on the way out, you have to realize interest rates are going to start a forty year fall starting in 1980, and you don't want all your money to stay in bonds when the great stock bull market starting in 1982 takes hold. It is so easy to see opportunities in hindsight. We bought a house around that time and thought a mortgage at 10% was good. Fortunately that was refinanced many times on the way down.
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Re: "How Safe Are Stable Value Funds?"

Post by anon_investor »

dbr wrote: Mon Jul 04, 2022 2:15 pm
anon_investor wrote: Mon Jul 04, 2022 2:09 pm
dbr wrote: Mon Jul 04, 2022 2:05 pm
anon_investor wrote: Mon Jul 04, 2022 2:01 pm
dbr wrote: Mon Jul 04, 2022 1:59 pm

In don't think that is far off. Both have what in practice is a pretty safe guarantee that the fund value will be kept. Both commit to an interest rate for a time. Both may very well change the interest rate after that time. The interest rate paid is probably not a lot greater for the one than the other, though the SV might tend to yield more than a three month CD on average, or maybe not.

I would say CDs and SV funds have always been regarded as useful fixed income instruments in portfolios.
Well my SVF has offered superior rates than 3 mo CDs. It offers a guaranteed rate for the quarter.
A person might find that a longer CD would do better as CD yields do tend to rise with term and rate is guaranteed for longer. But probably most of the time SV yield is decent, taking account of lagging trends.

But then I once made out like a bandit on 10 year CDs paying 10% after the peak of 1970's inflation.
Did they have 30yr treasuries back then? :shock:
There was a hiatus at some point but I imagine 20 year was there all along. The problem is to benefit you have to have a lot of money, you have to understand inflation is on the way out, you have to realize interest rates are going to start a forty year fall starting in 1980, and you don't want all your money to stay in bonds when the great stock bull market starting in 1982 takes hold. It is so easy to see opportunities in hindsight. We bought a house around that time and thought a mortgage at 10% was good. Fortunately that was refinanced many times on the way down.
10% mortgage! And today's 6% mortgages seem insanely high to me.

In 2020 after rates dropped my SVF was still offering 3%+, but I am more than a decade from retirement so my new money was all going to equities then (as per my IPS). Now my SVF is still offering rates over 3%, but again I am piling into equities (as per my IPS).
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Re: "How Safe Are Stable Value Funds?"

Post by Kinkajou82 »

bberris wrote: Mon Jul 04, 2022 2:01 pm Here is one from 2018, loss of about 5 %.

viewtopic.php?t=261726

Note that losses are most likely due to a change in sponsorship of the plan, not from failure of the insurance company backing the SVF. Insurance companies are much more stable than SVFs. The insurance contract voids the backing when mass withdrawals or liquidation happens because of a change in control of the 401k.
Thanks! That post has some very educational cases for how a Stable Value Fund can lose money in real life. The things it describes weren't covered in the article from the thread's OP so that was super useful.
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Re: "How Safe Are Stable Value Funds?"

Post by Northern Flicker »

The insolvency and liquidity risk for a stable value fund can play out two ways. 1) Withdrawals may be processed at market value of the underlying assets or the assets may be returned in-kind; and 2) If the assets are commingled in the same portfolio as backs other insurance products of the insurer, then in an insolvency, beneficiaries of the other insurance products will be making claims against the same assets.

The best protection from risk two is to stick with highly rated insurers. While there is no guarantee, if the insurer is well capitalized (say AM Best rating of A or higher) then this risk is low, but not zero. There will be an annual audit and new premiums and crediting rates will be set accordingly.

The first risk is can materialize even with a solvent insurer. There can be triggering events that lead to processing withdrawals at market value if there are high rates of withdrawals and interest rates have risen. The protection for this is to understand the makeup of the underlying assets, which admittedly can be a challenge. But if that can be accomplished, then the stable value fund would be integrated into a bond portfolio in the role of the underlying assets. Having them valued at market value is no different from holding the same portfolio of assets in a bond fund.

Thus if the stable value fund holds corporate bonds, a portfolio of 50% intermediate treasuries and 50% stable value fund would have similar risk to say the Vanguard intermediate bond index fund. I would say less risk because the term risk of the corporate bonds is traded off for solvency risk of the insurers.

The article has a list of bad providers of SVFs. That assessment depends on the fees assessed. In many 401K plans, these products are offered with fees around 2% skimmed off the top. These of course are not desirable investments. But in other 401K plans the fees may be in the range of 25-40 bp, which includes both portfolio management and the premium for absorbing term risk and credit risk. These can be attractive products if integrated into a portfolio with proper risk management as described above.

Lastly, moving assets from a bond fund to a stable value fund after a runup in interest rates generally is too late. It risks missing the upside of any rebound from the rate increases. No guarantees, but it usually is better to stay the course. On the other hand, if you have been in a stable value fund that no longer has a competitive crediting rate, moving to a high quality bond fund may be at least worthy of evaluation.
Last edited by Northern Flicker on Tue Jul 05, 2022 2:18 am, edited 1 time in total.
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Re: "How Safe Are Stable Value Funds?"

Post by anonenigma »

When my employer switched plan providers from AIG-VALIC to TIAA, there was a "market value adjustment" for funds invested in the AIG-VALIC stable value fund, which mapped to the TIAA Traditional Annuity (the 3% minimum liquid version). This happens when there is a change of plan providers and, on the day of the changeover, there is a difference, one way or the other, between "crediting value" and "market value" of the money invested in the stable value fund. I can't recall the economic circumstances that would governed the difference one way or the other, but it cut in my favor and the stable value portion of my account increased by 2 or 3%. It was a pleasant surprise.

TIAA definitely has a stable value offering in addition to the TIAA Traditional Annuity.

The argument about fees associated with stable value funds never resonated with me. You either want the promised rate of return or you don't. I didn't care how much profit TIAA made on the Traditional Annuity as long as I was paid the promised rate of interest which, of course, changed over time but never went below the 3% minimum. I held the Traditional Annuity in both my 403(b), which had no plan fee, and my 457(b), which at the time had a plan fee of 22 basis points. After I retired, I moved the TIAA funds from the 457(b) into the 403(b), which had no plan charge and happened to be paying 25 bp more - saved 47 bp with that move. With low interest rates over the past decade, I've really appreciated the unspectacular steadiness of the TIAA Traditional (even if its machinations are impossible to understand).
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Re: "How Safe Are Stable Value Funds?"

Post by bberris »

Kinkajou82 wrote: Mon Jul 04, 2022 9:59 pm
bberris wrote: Mon Jul 04, 2022 2:01 pm Here is one from 2018, loss of about 5 %.

viewtopic.php?t=261726

Note that losses are most likely due to a change in sponsorship of the plan, not from failure of the insurance company backing the SVF. Insurance companies are much more stable than SVFs. The insurance contract voids the backing when mass withdrawals or liquidation happens because of a change in control of the 401k.
Thanks! That post has some very educational cases for how a Stable Value Fund can lose money in real life. The things it describes weren't covered in the article from the thread's OP so that was super useful.
You're welcome. I'm not trying to talk anyone out of SVFs, just that you should have your eyes open to what could happen. Breaking the buck is a rare event, and is generally precipitated by an action of the employer (bankruptcy, takeover, change in plan sponsor) in a time of rising interest rates. I expect we will see some buck-breaking this year. Some people seem to be lulled into a false sense of security by having a good insurance company behind the contract. Insurance companies are highly regulated, their business is pretty predictable, and insurance company failures are very rare. An insurance company failure is not the major risk in SVFs.
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Re: "How Safe Are Stable Value Funds?"

Post by Northern Flicker »

bberis wrote: Breaking the buck is a rare event, and is generally precipitated by an action of the employer (bankruptcy, takeover, change in plan sponsor) in a time of rising interest rates.
For a bond fund, not “breaking the buck” would be the rarity. If a SVF had such a precipitated action, it means the withdrawals are processed at market value instead of stable value. This is equivalent to holding the portfolio of underlying assets as if it were a bond fund. As long as you understand the underlying portfolio, have incorporated its risks into your own portfolio risk management, and the risk is adequately compensated by the crediting rate of the SVF, breaking the buck is not a problem in that it is no different from holding the assets as a bond portfolio.

The problem is that many SVFs are fairly opaque so it is hard to know what the underlying portfolio is. And some have high fees that do not leave enough yield for investors for risk to be compensated adequately.
Last edited by Northern Flicker on Wed Jul 06, 2022 5:05 pm, edited 1 time in total.
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Re: "How Safe Are Stable Value Funds?"

Post by max12377 »

So I'm confused. My Lincoln stable value has a rate of 2.25. The expense ratio is .1. So is it the case that I am making 2.15 or 2.25? I was assuming I subtract the .1 to get the true rate (2.15), but posts above suggest the 2.25 rate is net of expenses.

Case I point - I am not a fan of being in a stable value fund as it is REALLY hard to find quality information about it. Apparently Lincoln is one of the bad ones ! Didn't know that.

I am considering rolling into a short term or ultra short term bond fund as the rates are now comparable. Intend to buy a house cash but not for another year or two.


Max
exodusNH
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Re: "How Safe Are Stable Value Funds?"

Post by exodusNH »

max12377 wrote: Wed Jul 06, 2022 1:48 pm So I'm confused. My Lincoln stable value has a rate of 2.25. The expense ratio is .1. So is it the case that I am making 2.15 or 2.25? I was assuming I subtract the .1 to get the true rate (2.15), but posts above suggest the 2.25 rate is net of expenses.

Case I point - I am not a fan of being in a stable value fund as it is REALLY hard to find quality information about it. Apparently Lincoln is one of the bad ones ! Didn't know that.

I am considering rolling into a short term or ultra short term bond fund as the rates are now comparable. Intend to buy a house cash but not for another year or two.


Max
The expense ratio is meaningless. They give you the contracted rate. I'm not sure why they show it -- likely to be consistent with the other funds or for statutory reasons. But it's just confusing. The ER could be 50% and you'd still get the 2.25%.

At the end of the day, they're basically bonds with an insurance contract guaranteeing the return.

You likely won't be able to roll it into short term bonds. You'll probably have to go into intermediate term or an equity fund for 30-90 days. Your 401k plan will have the details on the restrictions.
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Re: "How Safe Are Stable Value Funds?"

Post by Northern Flicker »

max12377 wrote: Wed Jul 06, 2022 1:48 pm So I'm confused. My Lincoln stable value has a rate of 2.25. The expense ratio is .1. So is it the case that I am making 2.15 or 2.25? I was assuming I subtract the .1 to get the true rate (2.15), but posts above suggest the 2.25 rate is net of expenses.

Case I point - I am not a fan of being in a stable value fund as it is REALLY hard to find quality information about it. Apparently Lincoln is one of the bad ones ! Didn't know that.

I am considering rolling into a short term or ultra short term bond fund as the rates are now comparable. Intend to buy a house cash but not for another year or two.
Max
You get the crediting rate, in this case 2.25%. But it may not be the yield. For many if not most SVF’s the crediting rate is the annual percentage increase of the investment with compounding of the yield.

If the fund pays interest monthly with an annual crediting rate of 2.25%, the annualized yield would be:

1200 x (12th root of 1.0225 - 1) = 2.227%.

In this scenario 2.227% is what you would compare to a fixed income fund.
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Re: "How Safe Are Stable Value Funds?"

Post by Northern Flicker »

exodusNH wrote: The expense ratio is meaningless.
The expense ratio is meaningful, just not used to compute the return from the crediting rate. The expense ratio is a measure of whether risk is being rewarded with the rate. An expense ratio of 0.1 means that less risky assets are needed to deliver a crediting rate of 2.25% than if the expense ratio was say 2%.
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Re: "How Safe Are Stable Value Funds?"

Post by exodusNH »

Northern Flicker wrote: Wed Jul 06, 2022 4:56 pm
exodusNH wrote: The expense ratio is meaningless.
The expense ratio is meaningful, just not used to compute the return from the crediting rate. The expense ratio is a measure of whether risk is being rewarded with the rate. An expense ratio of 0.1 means that less risky assets are needed to deliver a crediting rate of 2.25% than if the expense ratio was say 2%.
Ah, interesting perspective. I'll amend my statement with "meaningless when it comes to returns." I hadn't considered it any sort of risk measure.
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Re: "How Safe Are Stable Value Funds?"

Post by max12377 »

Northern Flicker wrote: Wed Jul 06, 2022 4:51 pm
max12377 wrote: Wed Jul 06, 2022 1:48 pm So I'm confused. My Lincoln stable value has a rate of 2.25. The expense ratio is .1. So is it the case that I am making 2.15 or 2.25? I was assuming I subtract the .1 to get the true rate (2.15), but posts above suggest the 2.25 rate is net of expenses.

Case I point - I am not a fan of being in a stable value fund as it is REALLY hard to find quality information about it. Apparently Lincoln is one of the bad ones ! Didn't know that.

I am considering rolling into a short term or ultra short term bond fund as the rates are now comparable. Intend to buy a house cash but not for another year or two.
Max
You get the crediting rate, in this case 2.25%. But it may not be the yield. For many if not most SVF’s the crediting rate is the annual percentage increase of the investment with compounding of the yield.

If the fund pays interest monthly with an annual crediting rate of 2.25%, the annualized yield would be:

1200 x (12th root of 1.0225 - 1) = 2.227%.

In this scenario 2.227% is what you would compare to a fixed income fund.
Thank you 🙏
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max12377
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Re: "How Safe Are Stable Value Funds?"

Post by max12377 »

exodusNH wrote: Wed Jul 06, 2022 2:26 pm
max12377 wrote: Wed Jul 06, 2022 1:48 pm So I'm confused. My Lincoln stable value has a rate of 2.25. The expense ratio is .1. So is it the case that I am making 2.15 or 2.25? I was assuming I subtract the .1 to get the true rate (2.15), but posts above suggest the 2.25 rate is net of expenses.

Case I point - I am not a fan of being in a stable value fund as it is REALLY hard to find quality information about it. Apparently Lincoln is one of the bad ones ! Didn't know that.

I am considering rolling into a short term or ultra short term bond fund as the rates are now comparable. Intend to buy a house cash but not for another year or two.


Max
The expense ratio is meaningless. They give you the contracted rate. I'm not sure why they show it -- likely to be consistent with the other funds or for statutory reasons. But it's just confusing. The ER could be 50% and you'd still get the 2.25%.

At the end of the day, they're basically bonds with an insurance contract guaranteeing the return.

You likely won't be able to roll it into short term bonds. You'll probably have to go into intermediate term or an equity fund for 30-90 days. Your 401k plan will have the details on the restrictions.
Thanks! Fortunately, I looked into it and there are no restrictions for moving out. That said, I don't have a short term bond fund in my 403b. I would have to roll it to an Ira at fidelity and then buy the short term bond fund. Still not sure if it's worth the hassle though. Not sure this stable value risk is greater than the risk of ever rising bond yields in the near term.
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Re: "How Safe Are Stable Value Funds?"

Post by bberris »

Northern Flicker wrote: Wed Jul 06, 2022 1:13 pm
bberis wrote: Breaking the buck is a rare event, and is generally precipitated by an action of the employer (bankruptcy, takeover, change in plan sponsor) in a time of rising interest rates.
For a bond fund, not “breaking the buck” would be the rarity. If a SVF had such a precipitated action, it means the withdrawals are processed at market value instead of stable value. This is equivalent to holding the portfolio of underlying assets as if it were a bond fund. As long as you understand the underlying portfolio, have incorporated its risks into your own portfolio risk management, and the risk is adequately compensated by the crediting rate of the SVF, breaking the buck is not a problem in that it is no different from holding the assets as a bond portfolio.

The problem is that many SVFs are fairly opaque so it is hard to know what the underlying portfolio is. And some have high fees that do not leave enough yield for investors for risk to be compensated adequately.
Here is what you are missing. You may be buying the SVF at a premium over NAV. There is that opacity. Then overnight the precipitating event happens and you've lost 5 %, when a bond fund would have lost maybe 1 %. Bond funds sell at NAV.
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Re: "How Safe Are Stable Value Funds?"

Post by Northern Flicker »

bberis wrote: Here is what you are missing. You may be buying the SVF at a premium over NAV.
The insurance company that is the provider of the stable value fund I have been using has total assets that are 430% of its total liabilities. They publish an account value daily and an annual crediting rate for the SVF. The asset allocation of the portfolio is published on the corporate web site. The SVF is a liability on their balance sheet. I don’t think mis-aligning account values with NAV of the underlying assets would pass muster with the annual audit of the insurer. This structure does mean that in an insolvency the beneficiaries of other products of the insurer would be making claims against the same portfolio. I’m ok with that risk. I’ve had a good 11-year run with it, and will probably re-allocate it to a TIPS fund at some point.

Many SVFs are fairly opaque. I would not invest in one where I did not know the makeup of the underlying assets because I would not be able to do risk management properly.

One other point about ER is that some stable value funds hold wrap contracts implemented by various insurance companies. The good news is this diversifies the insolvency risk across multiple insurance companies. The bad news is that this adds another layer of opacity. Related to that is that the ER may not be transparent. The published ER could be the admin cost of maintaining the portfolio of wrap contracts, while the individual wrap contracts have their own admin cost wrapped into the rate. Perhaps this structure also could be used to implement having SVF value exceed NAV of underlying assets by implementing the admin fee that way.

Do you have a reference for SVFs that hold assets at NAV lower than fund value?


I suppose the issue of buying in above NAV is if making regular contributions, interest rates are changing so that NAV of the underlying assets is fluctuating in between times when the crediting rate changes.
Last edited by Northern Flicker on Thu Jul 07, 2022 3:11 pm, edited 1 time in total.
alex_686
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Re: "How Safe Are Stable Value Funds?"

Post by alex_686 »

Northern Flicker wrote: Wed Jul 06, 2022 4:56 pm
exodusNH wrote: The expense ratio is meaningless.
The expense ratio is meaningful, just not used to compute the return from the crediting rate. The expense ratio is a measure of whether risk is being rewarded with the rate. An expense ratio of 0.1 means that less risky assets are needed to deliver a crediting rate of 2.25% than if the expense ratio was say 2%.
Don't let the tail wag the dog. What matters is yield. You want yield, yield is going to pay the bills. Yes, it may be nice to have bragging rights for a lower expense ratio. And of course the expense ratio is a drag on return so you want value for your expense ratio. The expense ratio only matters in how it effects yield.

Oh, BTW, the accounting standards between mutual funds and insurance products are different so you can't directly compare. A mutual fund can buy options which works de facto as insurance. As such this is not treated as a expense. On the other hand a stable value fund has to buy a functionally equivalent insurance wrapper and this purchase is treated as a expense.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Northern Flicker
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Re: "How Safe Are Stable Value Funds?"

Post by Northern Flicker »

It is not letting the tail wag the dog. If the SVF pays a crediting rate of 2.25% and the ER is 0.1% then the underlying assets must yield about 2.35%. But if the ER is 2% then the assets must yield about 4.25%, which will be higher risk assets.
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