Home Career This 401 (k) low risk investment is guaranteed not to lose money

This 401 (k) low risk investment is guaranteed not to lose money

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For investors who are nearing retirement or have already retired, who need confidence in cash, but want to make a little more profit, certain investments in your 401 (k) plan may fit the bill.

This is called a stable value fund (or something similar) and is usually only available through defined contribution plans such as 401 (k). Simply put, these low-risk funds aim to protect your principal and give you a little more profit than you get in a money market fund.

However, they also do not provide much growth, so they face the risk of inflation, which means that the value of your money may lose purchasing power. This makes these funds largely impractical for young investors whose retirement is decades away.

They are mostly suitable for investors who are very risk averse and are looking for a slightly higher return than they would get in cash.

Amy Arnott

portfolio strategist at Morningstar

And because the fund is in your 401 (k), you usually have to be at least 59 ½ years old – if you can start withdrawing from retirement accounts without penalties – to use the fund as an alternative to cash.

“They’re mostly suitable for investors who are very risk-averse and looking for a little more profit than they would get cash on,” said Amy Arnott, Morningstar’s portfolio strategist. “Their main role is to protect the director.”

According to the Stable Value Investment Association, approximately $ 908 billion has been invested in these funds. Older investors are more likely to use them when they retire: among 401 (k) participants over the age of 60, about 9.1% of assets are invested in stable value funds, according to a study by the Institute for Employee Payments Research. This is compared to 1.3% of investors aged 20 years.

“I love using them when someone is retiring soon,” said certified financial planner Ken Nattal, BlackDiamond Wealth’s chief investment officer in West Grove, Pennsylvania. – It’s more like cash.

Typically, advisors recommend that retirees have enough money to fund their income needs for 6-12 months so that they are not forced to sell investments in a declining market.

Stable value funds typically use short-term and intermediate fixed-income investments, but differ from bond funds in that the share price is a constant of $ 1. These funds also have an insurance component that ensures that the share price does not fall below this amount – which means no loss of principal debt, no matter what the broad markets do.

By comparison, investing directly in bond funds faces interest rate risk – as bond prices rise, bond prices fall. This year, amid rising rates, short-term bond funds have lost about 4% since the beginning of the year, Arnot said.

“Net returns of stable value funds have risen by about 0.4% since the beginning of the year compared to cash, which is basically the same,” Arnot said. “They may have a slight advantage over money market funds, but not enough to keep up with inflation.”

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Inflation is coming 8.3% year on year, according to the latest dimension from the U.S. Bureau of Labor Statistics. Although it is slightly below the March peak of 8.5%, it is still the fastest annual rate in about four decades and well above Federal Reserve target of 2%.

However, apart from the inflation risk of these funds, there are a few things to know. First, their cost varies greatly.

“The range of funds in our database is from 20 basis points [0.2%] up to 1.5%, ”Arnott said.“ So you definitely want to check [the cost] because it comes from the flow of your income into a stable fund of value. “

You should also limit the portion of your portfolio that is in a stable value fund.

“Use them to represent the cash part of your account – say, 5% to 10%,” said Tim Sobolewski, president of the Center for Financial Planning in Amherst, New York. “The problem is if someone dumps all the money in one because it won’t beat inflation.”

Also, if you use a stable value fund instead of a money market fund in your 401 (k), make sure you understand whether the provider sets liquidity limits. For example, some funds may limit your ability to transfer your stock to other investments in your 401 (k) plan.

Also, while these funds guarantee the safety of your investment, that guarantee will disappear in the window if, say, the insurance company defaults or sponsor 401 (k) (i.e. your company) goes bankrupt, Arnott said.

However, in terms of maintaining the principal amount, these funds have lived up to their promise, she said.

“This is not an area where we have seen a lot of losses,” Arnott said.

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