Stable Value Fund

Jim0445

Until today, I've only been an interested reader of posts here. My first post is to ask what readers here think of so-called Stable value funds offered in 457 plans. At age 67, I'm trying to move my equity ratio down to 50% (a traditionally "sound" investment principle) and have been buying good Intermediate term funds, generally with durations of 4 years or less such as DBLTX, DODIX, MWTRX, TGBAX (Load Waived) and VFIJX (in English, Doubleline TotRet, Dodge & Cox Income, Metro West TotRet, Templeton Global Bond and Vanguard GNMA). I don't plan to begin taking distributions other than the RMDs (age 70.5 yrs). With the prospect of rising interest rates (not certainty) and declining net asset values, I'm thinking of selling approximately half of these bond positions and moving the money into my Stable Value fund offering a yield of approximately 2.6%; the Stable Value Fund is divided among four stronginsurance companies. I say "half," because I realize that no one knows where interest rates are going for sure. What are your thoughts? Thanks.

fundalarm

I would think that having a chunk in Stable Value is a good idea. It is in effect a very short maturity bond fund with an insurance wrapper on top. if you're are 60/40 now and are going to sell 10% of equity to be more concervative (which makes total sense at your age and after the market's record run-up), it is only prudent to put the moneys into Stable Value. I am not however sure about the second leg of your intent: moving 50% of your bond allocation to SV. This is a market timing issue, and you might be perfectly right and interest rates will go up pretty soon, but with the tax increase only now starting to effect the economy, shrinking government expenses, and a sticky unemployment rate, i wouldn't bet on that. Would you consider, may be, moving 20% of your bonds to SV? (10% of total) SV's upside is limited, while the funds you listed might appreciate in value during stresses in the equity portion of your portfolio. Your total would be more like: 50% eqty/30% bonds/20% SV.

just an opinion of course.

Jim0445

Reply to @fundalarm: Thanks, Fundalarm. Lots of wisdom in your response.

Ted

Reply to @Jim0445: For your information.
Regards,
Ted
http://stablevalue.org/

AndyJ

I wouldn't reduce DBLTX at this point in favor of a stable value fund yielding ~ half as much; if you follow the fund closely, you've seen that NAV movements are very little to nil with the portfolio built as it is now. If that changes & it doesn't feel right, you could do something different, but if I were in your position, with the option you describe, I would let DBLTX be my "really close to stable value" fund, at least for now.

MikeM

Reply to @fundalarm: I think you plan and fundalarms advice is very good. I had a stable value fund in my 401k in the past and it was an excellence way to reduce portfolio volatility. Essentially cash with a decent return. My retirement plan eliminated that option and I miss it. Good luck to you.

Investor

I would not put a large chunk in Stable Value fund. They contain illiquid investments and in an environment like 2008 where they suffered losses and had to suspend redemptions. Read the disclosures of your Stable Value fund in your retirement plan. You can also google for more info.

In this case, there is no free lunch (extra yield) without extra risk.

Charles

From link Ted provided...a kind-of non-denial denial, like "I did not have sexual relations with that woman...":

Are there waiting periods and other restrictions that affect withdrawals from stable value funds?

Stable value funds do not have waiting periods or surrender charges for participants. In fact, the accounting rules for stable value funds do not permit these types of restrictions on participant-driven transactions.

Most stable value funds have equity wash provisions that restrict transfers from stable value funds directly to competing funds. Competing funds are typically money market funds or short-duration bond funds. The restriction requires transfers from stable value to sit in an equity fund for a set period of time, usually 90 days before the transfer is invested in a competing fund. Equity wash requirements serve to minimize arbitrage, which negatively impacts investors who choose to remain in the stable value fund.

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.

Given its fixed rate nature, GIC contracts may impose a surrender charge if the stable value fund elects to terminate the contract prior to its stated maturity date.

fundalarm

Reply to @Charles: this is for plan sponsor to deal with, not individual participants.

Charles

Got it, good to know and certainly makes them more attractive to investors. Thanks fundalarm.