FDIC Protected 401k Investments

Following the worst economic recession and financial crisis since the Great Depression, there has been a groundswell of interest for funds that are not only less risky, but also protected against loss by the Federal Deposit Insurance Corporation.

The FDIC, a government-sponsored entity born of the first Great Depression, was originally intended to make people feel safer about keeping their money in commercial banks. The idea is simple. The FDIC would charge banks a very small annual premium for insuring their assets, and those who used savings and checking accounts would be protected by the FDIC for up to $100,000 per account.

The FDIC was single-handedly responsible for turning around America's banks. Sensing security, cash flew from the sidelines back to the banking system, and thanks to a relatively safe 80 years of banking (with the exception of the savings and loan crisis), American savers with less than $100,000 per account never lost their FDIC insured savings.

Following the financial crisis, the FDIC protection limits have been raised from $100,000 to $250,000, a move that was first deemed temporary, though many expect it to remain a permanent fixture of financial planning. That $250,000 limit means that in every FDIC insured account, the first $250,000 in assets is immediately protected.

Keep in mind, however, that while retrieving money from the FDIC is guaranteed (the government can just print it if they really had to do so), it can take a number of weeks for the cash to be returned. In the grand scheme of things, those few weeks are a very small price to pay.


FDIC Insured 401ks

In an effort to provide investors with the style of asset protection they're looking for, companies in the retirement planning services business have created new accounts designed for 401ks that allow for FDIC insurance.

While mutual funds, bond funds, or other traditional investments don't quite fit the bill for FDIC insurance, there are several types of assets classes that do allow for insurance. Money market accounts have emerged as the most common in 401k plans, and financial planners have made arrangements to insure these accounts against loss through the FDIC. Keep in mind that a money market account is FDIC insured, a money market fund is not. The difference between fund and account is very small in terms of performance, but huge in terms of protection.

Unfortunately, the release of these new 401k savings vehicles came at a time when rates are their lowest in history. Regardless, they do provide for exceptional utility in maintaining the safety of your assets, combined with the tax advantages and employer match of a 401k. At the time of writing, such FDIC insured accounts provide little more than .40% per year. However, should rates rebound, as many think they soon will, these accounts could provide for very consistent, honest, and protected returns.

Maximizing FDIC Protection

With FDIC protection comes safety, and with safety comes low returns. While it would be unreasonable to expect that 401k savers will be able to retire on savings earning less than one percent per year, there are some ways to make use of this new account. These methods, though probably not recommended by your fee-seeking retirement planner, will make or save you plenty of money.

Nearing Retirement

As you near retirement, you'll probably start seeking out ways to reduce your overall exposure to the markets and wind down your exposure to stocks with bonds and fixed income products. Many also make the mistake of cutting off their 401k entirely, seeing little opportunity for safe investments and instead opt to receive a higher pay check than a 401k contribution.

These new FDIC funds, however, provide ample opportunity to reduce your reliance on stock and bond funds, while slowly diluting the “beta risk” of your retirement portfolio. Investors can instead swap their old diversified contributions for the funding of an FDIC insured money market account through their 401k. An investor who contributes $5,000 per year at a 50% employer match would effectively build $7,500 in savings per year, as well as reduce their total exposure to risk over time.

Plus, by building these cash savings, future retirees can draw on their money market account cash, rather than their stock and bond funds. This strategy allows for extending the time for growth or helps avoid selling your stock and bond funds at a temporarily low valuation. It is certain that many people wish they had done similar, directing their 401k savings to cash for the last decade and utilizing the cash to ride out a collapse of the stock market in 2008.

Pass-Through Account

This pass-through trick is excellent for 401ks with a brokerage window, or for accounts that incur hefty buy and sell costs for mutual funds.

Many investors are offered the ability to use a brokerage window to access funds and stocks they can't access through their plain-vanilla 401k offering. However, using the brokerage window is expensive, and it generates a commission for the management company any time an asset is bought or sold. Thus, an investor with regular contributions to a 401k would incur 26 transaction fees each year if he or she were to buy assets on the exchange each pay period.

With a FDIC insured account, however, the investor can deposit 100% of their retirement savings into a money market account before deploying the cash at regular intervals into other asset classes. This would allow a 401k retirement saver to make only four major transactions per year, thus incurring far fewer trading costs. The downside, however, is that the portfolio assignments are always at least one quarter delayed. As retirement savings grow, though, this effect slowly disappears.

Seek out your 401k or retirement savings account planner and see if an FDIC insured account is offered through your plan. Chances are, even if unadvertised, your 401k management company will be willing to open an account through your retirement savings, offering you an excellent tool to reduce your market exposure and total transaction costs.
Tim Ord
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