Retirement Planning
Stable Value – Good Or Bad for 401(k)s?
Stable Value funds are low risk choices in many 401(k)s. The funds create the illusion of stability by owning bonds and getting some big insurance company to eat any fluctuations in the fund’s price that result from bond prices changing when interest rates move.
Stable value funds tend to benefit investors over more traditional bond funds when interest rates rise sharply, but underperform when rates fall. But creating the illusion of stability isn't free, and you can expect stable value funds to underperform low fee bond funds over long periods of time.
The insurance industry has done a good job of getting this product into 401(k)s (where they now represent around 10% of all plan assets). Unfortunately for the insurance business, stable value funds are not going to be allowed in new automatic enrollment choices – the plan to opt in employees to their 401(k) as if they actively took steps to save. Apparently the labor department would rather see young investors splurging on stocks with a traditional bond chaser than use the nervous nelly stable value choice. Looks like the fund lobby beat the insurance lobby on this one.
A recent WSJ article notes the usefulness of stable value funds in 401(k)s:
But others say these funds, which are hybrids of fixed-income investments and insurance policies and are found in 401(k) plans and other retirement accounts, can have a place in a portfolio's conservative corner. They offer a good parking place for money that may be needed soon and may also work as a substitute for cash or as a holding for extremely risk-averse investors…
In some ways, they are similar to bank certificates of deposit. They aim to protect an investor's principal, and offer a yield that's typically at least a percentage point higher than that of a money-market fund with less volatility than a short-term bond fund….
We’re not so sure the portfolios of stable value funds are as rock solid as everyone thinks. Some of them might have invested in some once top investment grade mortgage debt that has suddenly fallen far down the bond quality totem pole. Unlike CDs, they are not guaranteed by the U.S. government.
In general we prefer low fee short term bond funds or money market funds for the safe yield allocation in a 401(k). Unfortunately sometimes stable value is the only safe choice in a 401(k) plan, or the bond or money market fund choices are expensive and crappy.
One oddity – why are ordinary super safe bank CD’s not in 401(k)s for a similar deliverable: no volatility and no risk?
401(k) Flubs
Good article on Zacks.com today that reviews five common 401(k) mistakes that could cost you a bundle over the long haul:
Not funding a 401(k)
About a third of eligible participants fail to enroll in a retirement plan. A huge majority of these people are younger workers. Of those who are making contributions, a large number are playing catch-up because they did not start saving for retirement until later in life. Why is this? The solution is as simple as picking up the phone and talking to your human resources group."
Not Contributing Enough
It is critical to sit down with a financial planner, or at the very least access a retirement calculator, to figure out how much you need to save in order to draw out a certain income after retirement. Here's a basic guideline. If you are making $50,000 annually, multiply that by 25. This means you will need to have saved $1,250,000 in your retirement account."
Taking Loans or Cashing Out
Don't do this! Many people take out loans while they are still employed with their firm and this is a very bad idea. Yes, when you take out a loan, you do pay yourself back with interest. However, when you take out the loan, your borrowed money is not working for you."
Putting all your contributions into company stock
Sometimes, disasters such as what happened at Enron or Worldcom can occur and wipe out your whole retirement savings plan in a heartbeat. What if you own a stock in a hot sector and you are about to retire? What if the sector turns cold and your savings of $1,000,000 turn into $500,000? All of a sudden you have to change gears and take less out of your savings or continue working into your 70s."
Allocation, Allocation, Allocation!
I’ve seen too many people piled into the hottest sector funds or hottest areas in the market only to get burned. These days this mistake commonly happens with commodity and energy funds. Don’t try to “get rich quick” because in all likelihood you will lose money very fast."
Shameless plug: If you think your 401(k) could use a little professional help, try MAXadvisor's 401(k) Planner. You tell us the mutual funds in your 401(k) plan, the MAXadvisor 401(k) Planner will tell you which funds you should consider, and the percentage of your company-sponsored retirement plan's contribution you should allocate to each fund. So we'll tell you how much to allocate to what, and we generally avoid company stock - thus eliminating two of the five problems mentioned above!
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