From time to time we field questions regarding our Prudential Guaranteed Investment* interest rate, especially in environments when interest rates are on the rise. The questions go something like this: How is it that the current guaranteed rate can ever be lower than short-term Certificate of Deposit or Money Market rates? Shouldn’t a long-term rate of return always beat a short-term fairly liquid investment?
A participant who recently called about this issue, suggested we include an explanation to help others understand.
Not apples to apples
The first thing you need to know is that comparing the Prudential Guaranteed Investment rate to Certificates of Deposit (CD) or Money Market account rates is not an apples to apples comparison. Our Prudential Guaranteed Investment account is a long-term savings vehicle, with goals and strategies fitting for long-term investing.
Goals and strategies
Prudential Retirement Insurance and Annuity Company manages the Prudential Guaranteed Investment. They describe the goals and strategies for this fixed income account as follows:
The goal of this portfolio is to maximize the long-term rate of return consistent with insuring the safety of invested assets.
By carefully structuring a portfolio of commercial mortgages plus privately placed and publicly traded debt securities, the portfolio manager seeks to achieve higher long-term yields than are available from public offerings, as well as an essential degree of liquidity.
In short, unlike Money Market or CD accounts, the Prudential Guaranteed Investment account has a long-term strategy designed to earn investors a higher return over time than could be realized by investing in the CDs or money markets offered commercially.
Over time, interest rates fluctuate. When rates to borrow money are decreasing, as they did between 2000 and 2005, long-term accounts will generally outperform short-term accounts such as CDs or money market funds. However, when interest rates rise, short-term rates will look better than a long-term rates offered through a retirement vehicle such as ours.
When interest rates level out, long-term managers will again outperform the short-term approach.
Historical interest rate
The table below shows the January 1 Federal Funds Rate (U.S. short-term benchmark set by the Fed’s monitoring policy committee), money markets (Morningstar category average for money market mutual funds) and the WEA TSA Trust program Prudential Guaranteed Investment (net of fees) interest rates from 2000-2018.
The historic returns under each scenario demonstrates the advantage of the long-term strategy Prudential Retirement Insurance and Annuity Company employs in the management of the WEA TSA Trust and the WEAC IRA Prudential Guaranteed Investment. This is for illustrative purposes only and not indicative of any investment. Guarantees are based on the claims paying ability of the issuing company.
How the rate is set
Each year in the fall the investment managers from Prudential calculate the estimated return of the portfolio and projected return for the next year. With this information and with input from our professional staff, the Board of Trustees approves the recommended rate and Prudential credits that rate for the next calendar year.
*Interest is compounded daily to produce a yield net of Prudential’s administrative fee of 0.60%. PRIAC is compensated in connection with this product by deducting an amount for investment expenses and risk from the investment experience of certain assets held in PRIAC’s general account.
All earnings on investments are credited gross of 403(b) and IRA program fees.
The Prudential Guaranteed Investment is a group annuity insurance product issued by Prudential Retirement Insurance and Annuity Company (PRIAC). Amounts contributed to the contract are deposited in PRIAC’s general account. Payment obligations and the fulfillment of any guarantees specified in the group annuity contract are insurance claims supported by the full faith and credit of PRIAC. PRIAC periodically resets the interest rate credited on contract balances, subject to a minimum rate specified in the group annuity contract and subject to change. Past interest rates are not indicative of future rates. Participant Level Protections (PLPs) are in place to help preserve the guarantee of the fund. PLPs may limit your ability to withdraw funds from the fund. For more information on the PLPs and how it may affect your account, please reference the Prudential Guaranteed Investment PLP question and answer sheet or by calling Retirement and Investment Services at 1-800-279-4030, Extension 8568.