Do 401(k)s Need Safer Investment Options?

Robert Powell MarketWatch August 27, 2010

Become a MarketWatch member today

Robert Powell

Aug. 27, 2010, 12:01 a.m. EDT · Recommend (1) · Post:

View all Robert Powell "º

"¹ Previous Column

Seven lessons learned from my father's death

First Take "º

For the Street, reputations at stake in 3Par war

By Robert Powell, MarketWatch

BOSTON (MarketWatch) -- You have to give the financial-services industry credit. If nothing else, the industry is great at cooking up products that tap into investors' fears.

Case in point: BB&T, a Winston-Salem, N.C.-based bank, earlier this month became the latest of a small but growing number of firms to roll out an "FDIC-insured deposit program" for its 401(k) retirement-plan sponsors and participants.

The new investment option -- the IDP -- will "provide an attractive alternative to money-market funds for participants whose retirement accounts are heavily weighted in cash," according to BB&T's release.

"Economic uncertainty and fluctuating markets have made participants acutely aware of investment risk," said Ray McCulloch, executive vice president of BB&T Institutional Services. "Now more than ever, investors seek to find a safe investment vehicle to invest cash balances, while earning a competitive return."

BB&T said money invested in the IDP, in essence a money-market deposit account, is treated as a deposit and is insured by the FDIC for up to $250,000 per individual, per account.

At the moment, only a relatively small number of plan sponsors and participants overall have access to these types of investments in their 401(k)s. Should savers who have access to this investment option contribute to an IDP? And what about those plan participants who don't have the choice? Can they expect their plan provider to introduce an FDIC-insured option, too?

Pamela Hess, Hewitt Associates' director of retirement research, said insured deposit products don't make "a ton of sense in defined-contribution plans." According to Hess, defined-contribution plans already have low-cost conservative investment options in place.

Some suggest that offering FDIC insurance is a bit of a marketing ploy that reduces the potential return of participant's contribution and takes advantage of savers' fear of losing money in their 401(k)s.

"FDIC insurance is available to basically guarantee the investments if the bank should fail," Hess said. "Assets in defined-contribution plans are held in trust, so they are not held in a bank, and banks have to hold reserves...which is why they need FDIC insurance. Because of this, FDIC insurance is not really relevant in defined plans."

Others agree that most plan participants, even those who want to avoid losing money in their 401(k)s, have other alternatives, including money-market funds, guaranteed insurance contracts (GICs), and stable-value funds, to name a few.

And many savers are already investing their money in such funds, according to Hewitt Associates' 401(k) Index, which tracks the asset allocations of 401(k) participants. According to Hewitt's July index, participants had on average just 1.4% of their 401(k) assets in money-market funds, 25.9% in GICs and stable-value funds, which are earning 2% to 3% right now, and another 7.2% is in bond funds. The rest is in a mix of company stock, stock, balanced, and target-date funds.

To be fair, experts said that some savers might want an alternative to money-market funds.

"The defined-contribution system is so big and diverse, likely this solution will work for someone," said Elmer Rich III, a principal at Rich and Co.

Robert Powell writes about retirement issues and produces the "Retirement Weekly" subscription newsletter.

On Wall Street, coffee and league-table bragging rights are for closers, writes David Weidner.

58 min ago1:15 p.m. Aug. 27, 2010

I want an investment option in my 401k that is guranteed by the govt not to lose any principle and will grow by 10% a year and is not taxed when I retire and withdraw funds. Am I asking for too much?"

- SuperMario | 9:32 a.m. Today9:32 a.m. Aug. 27, 2010

"Do #401(k)s need safer investment options? - MarketWatch - http://on.mktw.net/9HFXSX" 8:02 a.m. EDT, Aug. 27, 2010 from RJPIII

"What to buy instead of bond funds - MarketWatch - http://on.mktw.net/c6Dtyy" 7:56 a.m. EDT, Aug. 26, 2010 from RJPIII

"Seven lessons learned from my father's death - MarketWatch - http://on.mktw.net/ayY2pd" 5:38 a.m. EDT, Aug. 19, 2010 from RJPIII

"#investing... In your flight to safety, don't crash - MarketWatch - http://on.mktw.net/bVU1K2" 7:55 a.m. EDT, Aug. 18, 2010 from RJPIII

Jon Friedman

Media Web

Sarah Palin: America's media survivor

Mark Hulbert