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Wednesday, March 16, 2011 - 6:01 AM
Four options are reviewed in this Wall Street Journal article. The first option is bank accounts which should be no surprise. The last two have some risk but can offer a little higher yields: short-term bond funds and stable value funds. The article had a good overview of stable value funds:
These funds, available only in tax-deferred savings plans such as 401(k)s, typically consist of a bond portfolio combined with bank or insurance-company "wrap" contracts.

3
Ken TuminKen Tumin5,469 posts since
Nov 29, 2009
Rep Points: 125,077
1. Wednesday, March 16, 2011 - 6:19 AM
Due diligence is called-for on so-called "stable value funds." My wife was looking for a bond-fund alternative for her 401K. The only offering was a proprietary (non-publicly-traded) fund administered by a large, established brokerage house. Since I had an account with that brokerage, I called them and inquired into the components of the stable value fund. It took three phone transfers to three different desks, but I finally got a "snapshot" of the allocation. I decided it was impossible to compare this "stable-value" fund to anything with a ready benchmark, so my wife just kept her bond-fund allocation in an intermediate-term bond fund. While there is principal risk if rates shoot up, at least she gets the monthly dividend dripping back. Bottom line: caveat emptor on stable-value. You may wind up paying a fee for the privilege of earning a very paltry (<2%) yield, and there's no guarantee it will be any more "stable" than a garden-variety mid-to-low duration bond fund. As you might guess, for my IRAs, I prefer a CD ladder. Regrettably, that option is unavailable for allocation in my wife's 401K.

Regards,

Bozo 
4
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 937
2. Wednesday, March 16, 2011 - 12:15 PM
Stable Value Option can be quite an attractive investment option. As an example, my plan's SVO for first quarter 2011 is 3.71% APY. There's no fees, just a stated interest rate that changes quarterly. Other plans change rates monthly, quarterly, or semiannually.

SVO can provide the yield of a longer dated bond fund while the insurance wrap almost eliminates both the principal and interest rate risks. Contrast this to an intermediate bond fund that declines in value if interest rates rise or borrowers default. A CD ladder has FDIC insurance up to $250k per issuer, but there's an early withdrawal penalty to withdraw money or reinvest at higher rates.

If you read through SVO information from your plan provider, there's a couple risks. The guarantee is dependent on the claims-paying ability of the insurer. Also, there may also be provisions in the contract that if the employer has massive layoffs, bankruptcy, or plan termination, those events may not be covered by the guarantee. The fund would then be subject to a market value adjustment, and in a rising rate environment, that adjustment could be substantial (just as if you had invested in a bond fund with no guarantee).

Assuming those rare events don't happen, you get the high income without worrying about the fluctuations of the underlying securities.

Disclaimer: I work for a financial services company that sells this product.
4
AtlantaWolfAtlantaWolf40 posts since
Jan 16, 2010
Rep Points: 187
3. Wednesday, March 16, 2011 - 3:45 PM
To: AtlantaWolf

Thanks for the counter-point. Frankly, I wish the brokerage offering my wife's 401K stable-value fund could have been as knowledgeable about what they were providing as you are about what you provide. All I got was a pie-chart (the "snapshot) and some rather opaque comments about goals, targets, and past performance. The plan administrator (as opposed to the brokerage) knew virtually nothing about the stable-value fund, even though it was on their "menu." One thing I learned long ago was not to invest (or suggest that my wife invest) in something so complex it could not be explained in one simple paragraph, as you did so well. My wife's bond fund has, ironically enough, done well over the past few weeks (for obvious reasons), but you have motivated me to dig a bit deeper. Maybe if I can find the actual "person" at the brokerage who creates the particular fund in question, I can get more information.

Regards,

Bozo
4
BozoBozo137 posts since
Feb 14, 2011
Rep Points: 937
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