One of the safest investment options in the 401k, some money market funds are losing money.
Increasingly, investors in 401k money market funds look at their statements and find they have less money than they put into the fund.
Negative returns in a money market fund? How can that be? It’s probably not due to market losses. Most money market funds manage to keep the share price at a constant $1 per share.
The cause is low returns combined with fees.
- Related reading: What to do if your 401k is Losing Money in Market Turmoil
Sign of the Times
It’s hard to make money in a money market fund these days. Interest rates in general are low, and money market fund yields tend to move more or less with rates.
A money market fund is a mutual fund. No mutual fund is without fees. Managers have expenses, and they have to get paid. Money market funds are generally low fee funds, but miserable yields can lead to trouble.
Some money market funds and 401k providers have waived fees or subsidized the funds. But some eventually decided they can’t afford to keep it up.
401k Money Markets
In 401k plans, money market funds have to overcome additional fees. A 401k is more expensive to administer than individual accounts, and you may be paying part of the freight.
Fees are not necessarily bad. If you get something of value, you should expect to trade something in return. This page isn’t about high 401k fees; you can find rants about 401k fees elsewhere.
Take those rants with a grain of salt, and don’t do anything to jeopardize your retirement security (such as quit saving in disgust). With a competent and attentive employer, it’s unlikely that your fees are too high. Ask for details if you want them, and expect honest answers. If you get anything else, get advice from the Department of Labor.
Even reasonably priced small 401k plans are seeing money market fund losses. Emphasis on the word “small”. Smaller 401k’s are more expensive than large 401k plans that can buy in bulk, so they’re most likely to have negative returns in the money market fund.
What to do, if Anything
There are several things you can do about money market fund losses. Before doing anything, consider why you are in a money market fund. The funds are generally suitable for very conservative investors and/or those with a short time horizon. Are you one of those? Should you be?
The easiest solution: do nothing and wait it out. If you belong in the money market fund, you’re getting low returns along with a low level of risk. While you’re losing a little bit of money this year, you didn’t lose 60% a few years ago.
A short period of low-to-negative returns may not have a significant effect on your retirement income (supposedly that’s the goal of a 401k plan). Will it have an effect? Yes. Will it be significant? Only you can decide.
Fixed Accounts
Another solution: use a fixed account. Some 401k plans have a Fixed Account that currently pays more than the money market fund. The account, like a money market fund, is not guaranteed by any government agency; it has some risk, but not as much as the stock market.
Unfortunately, fixed accounts have restrictions. Just when everybody wants to jump into them (right now), interest rates are low. When interest rates rise, fixed-income investments suffer. You probably won’t notice losses, but the fixed account provider is likely to enforce restrictions.
Adding Risk
A third idea is to take more risk, if you’re comfortable doing so. Don’t just do it because you hate losing money in the money market fund. Only do it if it makes sense with respect to your goals. You might look for ultra-short-term bond funds issued by strong organizations (like the US government). Longer term bond funds will suffer when interest rates rise.
If you want to spice things up, you can move to a more diversified mix of investments. Your plan may offer a “Conservative” target risk fund that invests in a broad variety of places. You’ll have to look under the hood and decide if it is conservative enough for you.