Vanguard is an excellent investment custodian, and we certainly enjoy working with them. But how much do you know about the Vanguard cash balance plan investment options?
At Emparion, we are not financial advisors. As such, we don’t manage investments, nor can we tell you what to invest in. You are your plan trustee, and you are in charge of selecting all investments. If you’re not comfortable with this, you should seek out professional investment advice.
But what we can tell you is that cash balance plans come with an implied interest crediting rate. This is normally 5%. The IRS only allows a handful of different rates, which typically range from around 2 to 6%. So, needless to say, you are looking at more conservative investment options.
Do cash balance plans like volatile investments?
Cash balance plan assets do not like volatility. A few things to consider:
- As exposure to equities increases in a cash balance plan’s investment portfolio, volatility, and capital risk will increase, which may be unacceptable to these plans.
- Larger employers may be more amenable to swings in cash balance plan funding requirements due to volatility, but for smaller employers, such contribution volatility could be undesirable.
- Cash balance plans “don’t like volatility” and one of the biggest mistakes is not understanding investment options and how they impact the plan’s funding.
- The higher the interest crediting rate in a cash balance plan, the more likely it will be to reach the target, but given the volatility of equities, the risk of shortfalls increases as well.
Cash balance plan sponsors generally want to avoid high volatility in their investment portfolios, as it can lead to undesirable swings in required contributions and funding levels. Stability and predictability are preferred over chasing higher returns that come with increased risk and volatility.
How does investment returns impact plan funding?
If your company offers a cash balance plan, it means that it will contribute a specific percentage of the employee’s salary every year. The usual contribution rate ranges from 4% to 5%. However, the IRS provides other options for interest crediting rates.
While a cash balance plan allows you to invest your money in various options that provide a predictable rate of return, it’s important to note that market volatility can impact your investments. To counter this, you may need to adjust your retirement contribution, ensuring you’re prepared for potential fluctuations.
Cash balance plans are a unique type of retirement plan. They’re classified as a defined benefit plan, as the employer makes consistent contributions. However, these funds are then invested in the stock market, similar to a defined contribution plan. This hybrid nature offers benefits from both types of plans, making it an attractive option for employers seeking a balance.
On the other hand, if the investment earnings of the cash balance plan decrease below the interest credit rate, additional funding would be required to make up the difference and ensure the guaranteed benefits. However, this may negatively impact your company’s operations and cash flow. Hence, spending more should be done cautiously and only after considering all the factors.
Your firm’s TPA (third-party administrator) or actuary recommends investing in fixed-income assets such as treasury bills or bond funds, such as all fixed-income mutual funds or exchange-traded funds (ETFs). Although these options present some risks, they offer greater stability than equities.
What investment options do clients have?
Most of our clients will aggressively invest their 401(k) and IRA assets and keep their cash balance plan investments on the conservative side. Conservative investments are typically money market accounts and funds.
Certainly, some value and dividend stocks can make sense just as long as there’s no large allocation. But remember, you’re in charge of your own investments, so you feel free to do what’s best in your situation.
With most clients looking for money market accounts because they earn approximately 5%, which essentially matches an interest crediting rate, we’ll give you a few options at Vanguard. Feel free to reach out to Vanguard directly or consult with your financial advisor regarding applicability and investments that fit your situation.
| Good Investments ✅ | Be Careful ❌ |
| Commercial paper | Aggressive growth stocks |
| Money market funds | Bitcoin & cryptocurrency |
| Bonds and mortgages | Real estate investments |
| Certain balanced mutual funds | Private promissory notes |
What is a money market account?
A money market mutual fund is a type of mutual fund that invests in highly liquid, short-term debt securities such as cash, cash equivalents, and short-term debt instruments. The key features of a money market mutual fund are:
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Invests in short-term, high-quality debt securities like U.S. Treasury bills, commercial paper, and certificates of deposit.
- Designed to provide stability of capital, liquidity, and income.
- Offers potentially higher yields than a regular savings account, typically ranging from 4-5% APY.
- Subject to strict regulations by the SEC regarding credit quality, maturity, liquidity, and diversification of the fund’s investments.
- Available in different types based on the underlying investments, such as government, treasury, prime, and money market funds.
- Treated similarly to other mutual funds in buying and selling, with no transaction fees.
- Considered one of the lowest-volatility types of mutual fund investments.
Money market mutual funds are distinct from money market deposit accounts, which are interest-bearing bank accounts rather than mutual funds. While both aim to provide stability and liquidity, money market funds are not FDIC-insured like deposit accounts.
What money market accounts does Vanguard offer?
Vanguard offers a few different types of money market options:
- Vanguard Federal Money Market Fund (VMFXX): This fund invests in short-term money market instruments issued and backed by the U.S. government and its agencies. It seeks to provide current income while maintaining liquidity and stability of principal.
- Vanguard Cash Reserves Federal Money Market Fund (VMRXX): This fund invests in high-quality, short-term money market instruments such as commercial paper, certificates of deposit, and U.S. government securities. It seeks to provide current income while maintaining a stable $1 NAV (net asset value) per share.
- Vanguard Treasury Money Market Fund (VUSXX): This fund invests in high-quality, short-term money market instruments issued and backed by the U.S. Treasury. It aims to provide current income while maintaining liquidity and stability of principal.
Each of these options may have slightly different characteristics and may suit different investment objectives or risk tolerances. It’s always a good idea to review the specific details and performance of each fund before making an investment decision. Additionally, Vanguard may introduce new money market options or make changes to existing ones, so it’s a good idea to check their website or speak with a financial advisor for the most up-to-date information.
What bond fund mutual funds does Vanguard offer?
Vanguard offers a wide range of bond fund mutual funds, catering to various investment objectives, risk tolerances, and durations. Some of the prominent bond fund categories offered by Vanguard include:
- Total Bond Market Funds: These funds invest in a diversified portfolio of investment-grade bonds, aiming to provide broad exposure to the entire U.S. bond market. Examples include the Vanguard Total Bond Market Index Fund (VBTLX) and the Vanguard Total Bond Market ETF (BND).
- Intermediate-Term Bond Funds: These funds primarily invest in intermediate-term bonds, typically with maturities ranging from 5 to 10 years. They aim to balance income generation with interest rate risk. Examples include the Vanguard Intermediate-Term Bond Index Fund (VBILX) and the Vanguard Intermediate-Term Bond ETF (BIV).
- Short-Term Bond Funds: These funds focus on shorter-duration bonds, aiming to provide stability and income while minimizing interest rate risk. Examples include the Vanguard Short-Term Bond Index Fund (VBISX) and the Vanguard Short-Term Bond ETF (BSV).
- High-Yield Bond Funds: Also known as junk bond funds, these funds invest in lower-rated, higher-yielding corporate bonds, aiming to generate higher income at the expense of higher credit risk. Examples include the Vanguard High-Yield Corporate Fund (VWEHX) and the Vanguard High-Yield Bond ETF (VWEA).
- Inflation-Protected Securities (TIPS) Funds: These funds invest in U.S. Treasury Inflation-Protected Securities (TIPS), providing protection against inflation. Examples include the Vanguard Inflation-Protected Securities Fund (VIPSX) and the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP).
These are just a few examples, and Vanguard offers many more bond fund options, including actively managed funds, target-date funds, and international bond funds. It’s essential to carefully consider your investment goals, risk tolerance, and time horizon when selecting a bond fund, and consulting with a financial advisor can provide personalized guidance.
Is a Cash Balance or Defined Benefit Plan Right For You?
