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401k Fixed Account Risks

The fixed account is a conservative investment option in some 401k plans. Typically found in plans administered by insurance companies, the fixed account is a fixed-income option that sometimes pays more than Money Market Funds. The insurance company guarantees your principal, and pays interest on any money in the account (similar to interest paid on a savings account).

While the fixed account may be tempting, you should read your plan’s disclosures to understand any risks. Fixed accounts are generally not insured by any government agency; they’re only as solid as the company running them and the underlying investments.

By the way, there might be several types of fixed income investments in your retirement plan, and not all of them have the restrictions described below. Unfortunately, with some of those fixed income options, you basically take the same risk: that bonds will lose money when interest rates rise.

Limiting the Flow

Some 401k providers restrict how much you can move out of the fixed account. Just when you’ll want to get out, you may find yourself locked in. As interest rates rise and the economy improves, other investments including the money market fund may return more than the fixed account.

The rules may say that you can only move a small amount out of the fixed account each year, month, etc. For example, you might be limited to moving up to 20% of your fixed account balance to another investment each period.

That 20% may apply to the entire company 401k plan – not just your own assets! That means one person with a large balance may be the first one to hit the exits and ruin it for everybody else. You’ll have to wait until the next exit period and hope you’re at the front of the line.

If you leave your employer and try to liquidate the fixed account, you can still have problems. Some providers reserve the right to pay your fixed account balance out over 5 years, for example. You’ll earn interest, but you might not be happy about losing control of your money. However, in many cases you get at least a brief window to take your funds out of the fixed account after you stop working (30 to 60 days, let’s say).

Taking a Loss

Another risk of the fixed account is a Market Value Adjustment (MVA). If your holdings in the fixed account are liquidated (because your plan moves to a different provider, for example), you may lose money. Especially if interest rates have been rising.

With an MVA, your 401k provider reduces your balance in the fixed account to reflect losses they’ll take when cashing you out. Your employer might cover the MVA, or it might be your problem. Something to consider before loading up on the fixed account.

Filed Under: Uncategorized Tagged With: 401k, fixed account, MVA

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