In January of 2004 the Columbia Stable Value Fund B replaced the Dodge & Cox Fixed Income portfolio in the SUP Money Purchase Plan. Following is some additional background, based on questions we have received from members.
Why was the change in funds initiated?
To provide the greatest safety of principal for the assets in the SUP Money Purchase Plan, the trustees agreed that the assets should be invested in a portfolio that buys very high quality bonds with lower credit risk. CTC Stable Value Fund B invests in investment contracts issued by major insurance companies and banks to keep credit risk and interest rate risk to a minimum.
What is interest rate risk?
Interest rate risk refers to the effect of changing interest rates on bonds. Most bonds are issued with a fixed rate of interest. When interest rates rise, the value of an existing bond declines because it is paying a lower rate than what investors could obtain in the current market. When interest rates go down, existing bonds increase in value because they are paying a higher rate than newly issued bonds.
When the trustees decided to move the Money Purchase Plan assets to CTC Stable Value B, interest rates were at a 40-year low and were expected to begin rising again. CTC Stable Value B does not change in value due to changes in interest rates so your principal investment is not subject to interest rate risk.
What is credit risk?
Credit risk refers to the ability of a bond issuer to meet its principal and interest payments when due. If a company that issues a bond experiences financial difficulty or fails, the bondholders may not be paid the promised interest or the full amount of their principal. In exchange for greater safety, however, higher quality bonds are issued with a lower interest rate. Likewise, lower quality bonds generally pay a higher interest rate to compensate investors for greater risk. The trustees selected CTC Stable Value Fund B, because they felt the higher quality bonds in the portfolio provided better protection against credit risk than the predecessor fund.
Is the Dodge & Cox Income Fund still available?
Last summer, the Dodge & Cox Income Fund was added as an investment option for the self-directed portion of the SUP 401(k) Plan. This fund is similar to the Dodge & Cox Fixed Income portfolio mentioned above, but there are some key differences that you should be aware of.
The Dodge & Cox Fixed Income portfolio invested in short- and intermediate-term bonds. The Dodge & Cox Income Fund invests primarily in intermediate-term bonds that carry more risk than a combination of short- and intermediate-term bonds. The Dodge & Cox Income Fund may also invest in many different credit quality bonds, which can elevate credit risk.
For more information on the funds available through your plan, please consult the prospectus. You can obtain a prospectus by calling Columbia at 1-800-547-1037 extension 2120.
If you have additional questions about the investments available in your plan, please contact Joan Steel at Columbia by dialing 800-547-1037 extension 6378.