7

I am of an opinion that I should decide where my money should get invested and if it should get invested at all or not.

When I looked at the investment options I have with my 401k money, I figured out that there are many Mutual Funds that I can choose from. But I couldn't find a "Pure Cash - No investment option" - what I mean by this is an option where my money is kept idle without investing in any kind of financial instrument (stocks, bonds, other MFs, currencies, forex etc etc whatever).

I wanted such kinda option because things may turn bad and I may want nothing invested in the stock markets/bond markets. I was thinking that if the market turns bear then I would move everything to cash, but the cash option that is provided is not pure cash, it's again a fund basically which they call it as SF guaranteed. I dived in and investigated where this fund invests. It's portfolio consists of public bonds and mortgage loans and many other things. It means my money isn't getting invested as I want. There is no zero risk option! They have clearly mentioned that it has investment risk and it's not backed by any Federal fund. It's backed by the assets of the company that manages my 401k investments, duh! It's a private company. And who cares about that. I don't want any backing, I just want to keep my money in pure cash. Shouldn't I have an option to put my money into pure cash?

And if they aren't providing my an option why aren't they? What's there motive behind this?

What to do in such a scenario? My only point is I should decide where my hard earned money is invested. By giving all the options which in the end are investing in stocks/bonds/mortgage securities etc they are essentially telling me that all my 401k investment is subject to market risks! That's bad. There is no safe parking zone for turbulent times!

Any thoughts/advice would be greatly appreciated.

Thanks, Saurabh

  • 2
    You can hold cash, you just may not be able to hold it in your 401k. – BrenBarn Feb 20 '15 at 6:33
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    @BrenBarn: Didn't get you. I am talking about the amount which is in my 401k account. Say I have invested my 401k amount in some X mutual fund. Now for this year say I want to move that X amount to Pure Cash, this is option I'm talking about. – Saurabh Patil Feb 20 '15 at 7:00
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    Many 401k plans charge individual participants administrative fees. Note that these are not the expense ratios charged by the mutual funds etc in which the participant invests and which don't show up as explicit deductions from the 401k account. If you have a "pure cash" account, these will be deducted from the cash held, and you will ultimately get back less money than you put into the account. Also, since there will be no earnings in the account, inflation will have eaten away more at the value of your 401k assets. About the only advantage that I see for .... (continued) – Dilip Sarwate Feb 22 '15 at 21:20
  • ... PureCash option is that with a Traditional 401k, you will be deferring paying income tax on your contributions (as reduced by fees) until such time as you withdraw them. If you are contributing to a Roth 401k, then even this little solace will be denied to you: you will be giving the 401k administrator a bunch of post-tax money to hold for you till you decide to take a distribution at which time you will get back a little less than you contributed. – Dilip Sarwate Feb 22 '15 at 21:25
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Holding pure cash is a problem for 401K companies because they would then have follow banking rules because they would be holding your cash on their balance sheets. They don't want to be in that business. Instead, they should offer at least one option as a cash equivalent - a money market fund. This way the money is held by the fund, not by 401K administrator.

Money Market funds invest in ultra-short term paper, such as overnight loans between banks and other debt instruments that mature in a matter of days. So it is all extremely liquid, as close to "Money" as you can get without actually being money.

It is extremely rare for a money market fund to lose value, or "break the buck." During the crisis of 2008, only one or two funds broke the buck, and it didn't last long. They had gotten greedy and their short term investments were a little more aggressive as they were trying to get extra returns.

In short, your money is safe in a money market fund, and your 401K plan should offer one as the "cash" option, or at least it should offer a short-term bond fund. If you feel strongly that your money should be in actual cash, you can always stop contributing to the 401K and put the money in the bank. This is not a good idea though. Unless you're close to retirement, you'll be much better off investing in a well diversified portfolio, even through the ups and downs of the market.

9

Your employer decides what options you have in the 401k. You can talk to your HR about that. There are requirements for diversity of various types of investments, money-market funds is being one of them. That is the investment account equivalent of cash. While it is not really cash but rather short term bonds - the term is generally very short and the risk is very limited. You can't earn much there, and you can't lose much there - so for all intents and purposes you can treat is as a cash-equivalent.

  • No matter how close a money market fund comes to zero risk of investment devaluation, there's still a huge difference vs a deposit account -- the money market account is not FDIC insured. – Ben Voigt Dec 6 '16 at 23:48
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The short term bond fund, which you are pretty certain to have as an option, functions in this capacity.

Its return will be low, but positive, in all but the most dramatic of rising rate scenarios. I recall a year in the 90's when rates rose enough that the bond fund return was zero or very slightly negative. It's not likely that you'd have access to simple money market or cash option.

2

This situation, wanting desperately to have access to an investment vehicle in a 401K, but it not being available reminds me of two suggestions some make regarding retirement investing:

  • Once you hit the maximum match in a 401K you switch to a IRA/Roth IRA for your investments. This allows you to invest in a greater list of vehicles.
  • When you leave a company don't keep the money in the old 401K, and don't roll it into the new 401K; instead roll it into a IRA/Roth IRA.

This allows you the maximum flexibility in your retirement investing.

I have never, in almost 30 years of 401K investing, seen a pure cash investment, is was always something that was at its core very short term bonds. The exception is one company that once you had a few thousand in the 401K, you could transfer it to a brokerage account. I have no idea if there was a way to invest in a money market fund via the brokerage, but I guess it was possible.

You may have to look and see if the company running the 401K has other investment options that your employer didn't select. Or you will have to see if other 401K custodians have these types of investments. Then push for changes next year.

Regarding external IRA/Roth IRA: You can buy a CD with FDIC protection from funds in an IRA/Roth IRA. My credit union with NCUA protection currently has CDs and even bump up CDs, minimum balance is $500, and the periods are from 6 months to 3 years.

  • 2
    How is it answering the question asked? – littleadv Feb 21 '15 at 7:40
  • @mhoran_psprep : Will the IRÁ/roth IRA give me a pure Cash option to park my money? – Saurabh Patil Feb 21 '15 at 18:11
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    It can. You can buy a CD with FDIC protection from funds in an IRA/Roth IRA. My credit union with NCUA protection currently has CDs and even bump up CDs. – mhoran_psprep Feb 21 '15 at 18:18
  • I agree with littleadv. This is not an answer to the question asked. – Dilip Sarwate Feb 21 '15 at 18:20
1

There is no zero risk option!

There is no safe parking zone for turbulent times!

There is no such thing as a zero-risk investment. You would do well to get this out of your head now. Cash, though it will retain its principle over time, will always be subject to inflation risk (assuming a positive-inflation environment which, historically in the US anyway, has always been the case since the Great Depression).

But I couldn't find a "Pure Cash - No investment option" - what I mean by this is an option where my money is kept idle without investing in any kind of financial instrument (stocks, bonds, other MFs, currencies, forex etc etc whatever).

Getting back to the real crux of your question, several other answers have already highlighted that you're looking for a money market fund. These will likely be as close to cash as you will get in a retirement account for the reasons listed in @KentA's answer.

Investing in short-term notes would also be another relatively low-risk alternative to a money market fund. Again, this is low-risk, not no-risk.

I wanted such kinda option because things may turn bad and I may want nothing invested in the stock markets/bond markets. I was thinking that if the market turns bear then I would move everything to cash

Unless you have a the innate ability to perfectly time the market, you are better off keeping your investments where they are and riding out the bear market. Cash does not generate dividends - most funds in a retirement account do. Sure, you may have a paper loss of principle in a bear market, but this will go away once the market turns bull again. Assuming you have a fairly long time before you retire, this should not concern you in the slightest.

Again, I want to stress that market timing does not work. Even the professionals, who get paid the big bucks to do this, on average, get it right as often as they get it wrong. If you had this ability, you would not be asking financial questions on Stack Exchange, I can tell you that.


I would recommend you read The Four Pillars of Investing, by William Bernstein. He has a very no-nonsense approach to investing and retirement that would serve you (or anybody) well in turbulent financial markets. His discussion on risk is especially applicable to your situation.

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Technically there could be a true cash fund, but the issue is it would need to have some sort of cost associated with it, which would mean it would have negative yield or would charge a fee. In some cases, this might be preferable to having it invested in "cash equivalents," which as you note are not cash. It is important to note that there is nothing, even cash or physical precious metals, that is considered zero risk. They all just have different risks associated with them, that may be an issue under certain circumstances. In severe deflation, cash is king, and all non-cash asset classes and debt could go down in value. Under severe inflation, cash can become worthless.

One respondent mentioned an alternative of stopping contributing to a 401k and depositing money in a bank, but that is not the same as cash either. In recent decades, people have been led to believe that depositing your money in the bank means you hold that in cash at the bank. That is untrue. They hold your deposit on their books and proceed to invest/loan that money, but those investments can turn sour in an economic and financial downturn. The same financial professionals would then remind you that, while this is true, there is the Federal Deposit Insurance Corporation (FDIC) that will make you whole should the bank go under. Unfortunately, if enough banks went under due to lack of reserves, the FDIC may be unable to make depositors whole for lack of reserves. In fact, they were nearing this during the last financial crisis. The sad thing is that the financial industry is bias against offering what you said, because they make money by using your money. Fractional reserve banking. You are essentially holding IOUs from your bank when you have money on deposit with them.

Getting back to the original question; you could do some searching and see if there is an institution that would act as a cash depository for physical cash in your IRA. There are IRA-approved ways of holding physical precious metals, which isn't all too different of a concept from holding physical cash. 401k plans are chosen by your company and often have very limited options available, meaning it'd be unlikely you could ever hold physical cash or physical precious metals in your 401k.

  • 1
    Precious metals are not cash-equivalents. Even when held as coins, that just sets a minimum value, usually far below what you paid for them as metal; their actual value at any moment is as variable as any other commodity. – keshlam Sep 10 '15 at 22:13
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    It was not implied that precious metals were cash equivalents. Rather, the reason I brought up physical precious metals was because of the relationship to his question about third party custody and depository. While such a thing could exist for physical cash, I am not currently aware of one. Although precious metals are in fact money in a traditional sense even if they have no direct tie (anymore) to fiat currency and physical cash. – Michael B Sep 11 '15 at 21:51
  • Precious metals "are money" only in the sense that anything nonperishable can be agreed upon to be a medium of exchange, with scarcity being a useful limit on how much is in circulation. If folks decide that something else is a better medium of exchange, your metal is worth o ny what demand for it as a resource gives it... and while gold has its uses, there's not as much practical need for it as there was when materials science was more primitive. Believe what you wish, but I just don't see precious metals as inherently having excess value. – keshlam Sep 11 '15 at 22:29
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    Your off-topic here. The answer I provided was related to the question asked, and reference to precious metals was in relation to the similarity with holding physical precious metals in your retirement account. If you don't think precious metals have any value beyond their utility as an industrial commodity, that is great, but still irrelevant. That said, if you use your logic, the dollar itself has no useful properties aside from people agreeing to use it for this brief moment in time as money. Governments can create it out if thin air to finance debt, and there is no industrial uses for it. – Michael B Sep 13 '15 at 18:29
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My 401k allows cash holdings to 100% if desired. I'm not sure why some won't, they are making money on your money after all. If you are looking to the funds vehicles for investing suggestions however, they will never allow cash. I found you must go into "Invest on my own" vehicle to make that change.

I have beaten and timed this market several times by sitting with cash on the sidelines. The only time I missed it was when I talked to a fund administrator in 2008 dot com crash and stayed in at this suggestion. I told him I didn't see where the market could go much higher as I had made 12-28% on some funds. He was dead wrong of course and I lost 50% that year.

Now, trust me, in 2017, assets are grossly overvalued. If they won't let you deposit to cash, don't invest and just save your money until the next crash.

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