Author Topic: Is this fixed interest account a bad idea.  (Read 5742 times)

SMMcP

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Is this fixed interest account a bad idea.
« on: March 29, 2013, 03:24:23 PM »
I and some of my friends at work have a significant portion of our 403bs in a fixed interest account offered by MetLife.  The account pays 3% which seems pretty decent for such a low risk investment.  But when I started looking closely recently I began to wonder just how low risk it is.  The information on the website states "The fixed interest account is guaranteed by Metropolitan Life Insurance Company and is backed by MLIC's general fund which invests primarily in bonds.  OK, what if something major happens in the bond market or what if MetLife goes under.  If you're invested in equities, as long as you don't sell in a down market you'll end up OK over the long term.  But with this "investment" could your money just disappear completely?

Kriegsspiel

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Re: Is this fixed interest account a bad idea.
« Reply #1 on: March 29, 2013, 03:47:00 PM »
I'd consider it fishy.  If it's covered by FDIC, then it might not disappear completely, but 3% isn't a risk-free investment nowadays, since the only investments where you have the highest chance of getting back your whole investment, Treasury bonds, are barely higher than 3%. 

They're obviously taking your money, investing it in higher risk securities, taking a cut off the top, and paying the remainder to you.  If you are comfortable with that, then go for it.  If not, don't.

chucklesmcgee

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Re: Is this fixed interest account a bad idea.
« Reply #2 on: March 29, 2013, 04:00:37 PM »
If you're invested in equities, as long as you don't sell in a down market you'll end up OK over the long term.

No. If a bond holder is unable to make their payments, you're screwed.

In the case of MetLife, the general fund provides a bit of a buffer against market downturns or defaults. Either you're getting your money or MetLife goes under. You're trading some returns in exchange for this added security.

I don't think it's an especially good or bad deal.


KingCoin

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Re: Is this fixed interest account a bad idea.
« Reply #3 on: March 29, 2013, 04:18:17 PM »
I think the devil is in the details on this one.

"backed by MLIC's general fund which invests primarily in bonds"

The key questions are:
1) How safe are the bonds they invest in? Are we talking treasuries or a lot of high yield or exotic mortgage products?
and more importantly
2) In a bankruptcy, how does your claim on this fund stack up against competing claims? Are you one of the first or last to get paid out from the proceeds? This can easily make the difference between getting par and getting 0 if Metlife goes under.

brewer12345

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Re: Is this fixed interest account a bad idea.
« Reply #4 on: March 29, 2013, 04:43:10 PM »
For professional reasons, I cannot speak specifically to MetLife.  However, I can share a bit of knowledge more generally about these types of accounts.  What you are being offered is essentially a stable value fund backed solely by a single insurer.  These things look like money market funds but have yield comparable to a bond fund.  They are not FDIC insured, instead you would have status as a policyholder in the event of an insolvency of the issuer.  When an insurer goes tits up, policyholders get paid first, then debt holders, then everyone else.  The track record is pretty good, as policyholders generally get 90+% recoveries and in many cases they get everything they are owed.  Insolvencies are rare, and the last one of any size that stiffed policyholders was Executive Life (early 1990s).  If the insurer's assets are not sufficient to cover what is owed, they are backed by state guaranty associations.  More info here: www.nolhga.com

SMMcP

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Re: Is this fixed interest account a bad idea.
« Reply #5 on: March 29, 2013, 04:56:31 PM »
For professional reasons, I cannot speak specifically to MetLife.  However, I can share a bit of knowledge more generally about these types of accounts.  What you are being offered is essentially a stable value fund backed solely by a single insurer.  These things look like money market funds but have yield comparable to a bond fund.  They are not FDIC insured, instead you would have status as a policyholder in the event of an insolvency of the issuer.  When an insurer goes tits up, policyholders get paid first, then debt holders, then everyone else.  The track record is pretty good, as policyholders generally get 90+% recoveries and in many cases they get everything they are owed.  Insolvencies are rare, and the last one of any size that stiffed policyholders was Executive Life (early 1990s).  If the insurer's assets are not sufficient to cover what is owed, they are backed by state guaranty associations.  More info here: www.nolhga.com

Thank you, this is very helpful.

brewer12345

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Re: Is this fixed interest account a bad idea.
« Reply #6 on: March 29, 2013, 05:59:01 PM »
For professional reasons, I cannot speak specifically to MetLife.  However, I can share a bit of knowledge more generally about these types of accounts.  What you are being offered is essentially a stable value fund backed solely by a single insurer.  These things look like money market funds but have yield comparable to a bond fund.  They are not FDIC insured, instead you would have status as a policyholder in the event of an insolvency of the issuer.  When an insurer goes tits up, policyholders get paid first, then debt holders, then everyone else.  The track record is pretty good, as policyholders generally get 90+% recoveries and in many cases they get everything they are owed.  Insolvencies are rare, and the last one of any size that stiffed policyholders was Executive Life (early 1990s).  If the insurer's assets are not sufficient to cover what is owed, they are backed by state guaranty associations.  More info here: www.nolhga.com

Thank you, this is very helpful.

I would be remiss if I did not mention that the lack of FDIC insurance/gubmint backing combined with the opacity of insurer financial statements means that it pays to be careful.  When I buy insirance products, I generally shop for a carrier that has at least an Aa3/AA- or better rating, is preferably a mutual company, and the bigger the better.  That said, a mutual life insurer with an A1/A+ rating would be acceptable to me.