If you have a 401(k), 403(b), or similar retirement plan, you may have an investment option called a stable value fund. Sometimes it goes by a different name like Guaranteed Pooled Fund, but they are always marked as a conservative investment. The pitch is basically the higher interest rate of longer-term bonds, with the relatively liquidity and stable principal value of a money market fund. I explored the risks and rewards of stable value funds before and currently hold them as part of my bond allocation.
My specific stable value fund is run by Transamerica Financial Life Insurance Company (TFLIC) and offered an interest rate of 3.5% for all of 2010, which was much higher interest than any other similar bond investment was going to pay me. Then they told me that until February 28th, 2011, the interest rate would be 3.0%. Finally, I just received a letter that told me that the interest rate from March 1st to December 31st, 2011 would be lowered to 1.8%.
So, should I stay or should I go? Interest rates continued to drop in 2010, so I did expect them to lower their rate.
Online savings accounts like Capital One 360 are paying around a low 0.75% APY, and I have no access to something like that in my 401k. They recently announced a self-directed option through Schwab, although I need to find more details about how much transaction costs would be. The Vanguard Short-Term Treasury Fund (VFISX) is currently yielding only 0.66%. Taking a look at current Treasury yields shows the 2-year at 0.78% and the 5-year at 2.30%.
So the interest rate itself is still pretty competitive relative to other “safe’ investment options. My other bond alternative inside the account is the huge PIMCO Total Return fund (PTTRX) with a 3.12% yield and 4.8 year duration, which did pretty well for me when I had it but I worry about asset bloat with $240 billion is assets, manager risk, and interest rate risk.
In the absence of any significantly better options, it looks like I’m staying put.