Stable Value Funds inside my 401k

[MnWolf]

Thinking about my 401k. There are lots of options, most of which I won't touch because of high fees. But there are three funds which I am considering:

An S&P 500 Index fund, .05% fees
A Core Bond Index fund, .10% fees
A Stable Value fund which guarantees 2.3% net of fees through this year.

I've always kept to 60% S&P 500, and 40% Core Bonds. I don't think that I've traded at all over the past few years, except to re-balance a few times. I saw an article saying that a Stable Value fund is one of a few reasons to stick with a 401k as opposed to say rolling over to an IRA. I don't see very much information about Stable Value funds. What do you think of moving part (maybe half?) of my Bond holdings to Stable Value?

 

[Matt]

Thinking about my 401k. There are lots of options, most of which I won't touch because of high fees. But there are three funds which I am considering:

An S&P 500 Index fund, .05% fees
A Core Bond Index fund, .10% fees
A Stable Value fund which guarantees 2.3% net of fees through this year.

I've always kept to 60% S&P 500, and 40% Core Bonds. I don't think that I've traded at all over the past few years, except to re-balance a few times. I saw an article saying that a Stable Value fund is one of a few reasons to stick with a 401k as opposed to say rolling over to an IRA. I don't see very much information about Stable Value funds. What do you think of moving part (maybe half?) of my Bond holdings to Stable Value?

I probably wouldn't. I would use it to surrogate for cash/short term bonds, but not long term/core bonds. How has the performance been on the bond fund?

 

[MnWolf]

The bond fund has been a very close match to the Barclays Capital Aggregate Bond Index

Last 3 months 1 year 3 year(avg) 5 year(avg)
My Bond fund -3.0 2.6 3.0 2.2
Barclay's -3.0 2.7 3.0 2.2
Stable value 0.6 2.3 2.2 2.4

I'm thinking that I'd be really glad to end up with 2.3% gain in bonds this year

 

[Matt]

The bond fund has been a very close match to the Barclays Capital Aggregate Bond Index

Last 3 months 1 year 3 year(avg) 5 year(avg)
My Bond fund -3.0 2.6 3.0 2.2
Barclay's -3.0 2.7 3.0 2.2
Stable value 0.6 2.3 2.2 2.4

I'm thinking that I'd be really glad to end up with 2.3% gain this year

The way bond funds will work is that price of the bond will react to the increase in rates, so you'll see an immediate decline, but when the rates rise you also get more bonds at the higher rate, so it will 'catch up'. The lag between the two events is what you are feeling now. IE you are paying the price at the 3 month-3.0 but haven't seen the increased bond premium payments hit the account yet.

If you are to switch, it wouldn't be terrible. The caveat is that I'd check to see if you are locked in. Stepping into a 2.3% rate now is OK if you can step out again after the next Fed rate increase.

 

[dr0832]

Federal funds rate is about to get a potential .25% increase this week which will send prices of bond funds lower.

 

[MnWolf]

Yes, but then since it's pretty much a certainty, isn't there a good chance that the .25% increase is already "factored in" to the current prices people are willing to pay? In fact, I would not be surprised if bond prices go up after the actual announcement. I have proven to myself many times that I have absolutely no ability to tell how a given event will affect stock prices. Bond prices, I haven't been paying as much attention to specific triggers.

I do know that this is about the fifth year that interest rates have "nowhere to go but up". But I guess by swapping part of my bond allocation into a guaranteed 2.3%, I'm joining that crowd. Matt (whose opinion I greatly respect) says that he probably wouldn't. Anyone else?

 

[Cytraveler]

On a different, but related question: Is this where you're currently employed, or do you have the option of rolling over to an IRA? One of your comments made me think you might have that option. If the latter, get some more info and consider rolling over. You say the S&P 500 Index has a fee of .05%, but it's possibly you have higher fees than that. Many 401ks have an advisor, and the advisor fees might be paid by the company, but more likely are paid by the employees. It doesn't show in the fund fees, but it comes out of the performance. You can tell if you have this by the annual notification that comes in. If this is the case, you'll have a different fund class, that has lower returns - the difference is what goes to the advisor.

 

[MnWolf]

Good question. It's where I currently work, and it's managed by Aon-Hewitt. According to my reading of the plan documents, I can roll most of it out when I turn 59-1/2, which is quite soon. I had been really looking forward to that, because the funds are all proprietary, they don't report prices until about 9pm, and they don't download prices into Quicken. I was planning on getting out all that I could, until I thought more about the Stable Value fund, as these types of funds are only available through a 401k. But yes, you raise a good point, and everything outside of what I keep in Stable Value will go over to Vanguard.

 

[Cytraveler]

It sounds like you have an advisor-led fund, which means that you likely have hidden fees that are deducted from returns, and NOT in the fees listed for each fund - revealed only once a year if that's the case. So the Stable Value Fund might have fees embedded in the returns. Take a look at that annual statement, and call your advisor to find out.

It's rather insidious, if you ask me, how these fees are incorporated in. I manage our company's 401k and we don't have fees paid by employees. An advisor is pitching to me taking it over -which would be great because I wouldn't have so much paperwork (it's not the main thing I do, so it's hard to keep up with), but there's this hidden fee aspect that I'm not willing to do to our employees.

You'll want to know the true cost of whatever you keep, or change to.

 

[Matt]

As an aside, check out Guideline.com for the 401(k)

 

[Matt]

Federal funds rate is about to get a potential .25% increase this week which will send prices of bond funds lower.

This could be a good talking point.

 

[MnWolf]

As I said above, I was not surprised that it went up. But I'm very surprised by how much it went up. One reason that I've heard is that people had factored in more aggressive rate increases, and the Fed's discussions made that seems less likely.

One thing that it underscores to me is that the bond market, like the stock market, can be driven by factors other than just interest rates and duration, like expectations and momentum. But I'm more inclined to believe that these are smoothed out over the long run by the fundamentals. While it can be difficult to get a real value for a stock, it seems bonds should tend toward calculable values.

 

[Matt]

As I said above, I was not surprised that it went up. But I'm very surprised by how much it went up. One reason that I've heard is that people had factored in more aggressive rate increases, and the Fed's discussions made that seems less likely.

One thing that it underscores to me is that the bond market, like the stock market, can be driven by factors other than just interest rates and duration, like expectations and momentum. But I'm more inclined to believe that these are smoothed out over the long run by the fundamentals. While it can be difficult to get a real value for a stock, it seems bonds should tend toward calculable values.

I think it is important to note how bond funds act differently from individual bonds. The individual bond will find itself with a price drop in relation to the interest rate move, but the fund may increase in value despite this, as more people may decide to buy the fund knowing that bond rates are increasing, and therefore worth moving from cash into.

The amount of movement wasn't that surprising, you will see this ETF move 20bps daily based on little news, so 50bps isn't that much more.