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Beware money funds in 401(k)s

By Sheyna Steiner ·
Wednesday, September 3, 2014
Posted: 1 pm ET

© alphaspirit/Shutterstock.comIn July, the Securities and Exchange Commission, or SEC, issued new rules for money market funds.

After the rules go into effect in 2016, it will be possible for investors to lose money in money market funds -– mainly institutional investors. When the rules kick in, prime money market funds will post the real value of their investments with a floating net asset value, or NAV, as opposed to the fixed $1 NAV that has been the rule.

Money funds available to regular people, as opposed to institutions, were only partially hit by this regulation. If a crisis hits and money market funds impose redemption fees and gates (time delays on redemptions during crises), small investors run the risk of taking a hit to principal in the form of a fee if they want to pull their money out of the fund during a time of stress.

But small investors, particularly those in 401(k)s, may not be as safe from market vagaries as a safe investment would imply. A recent column on the website Marketwatch, "Your safe money-market fund may be at risk," pointed out that some plan sponsors may offer money market funds that will feature floating NAVs.

Plus, all investors in money funds should investigate their funds' plan for redemption fees and gates. There are plenty of other safe investment options including certificates of deposit and money market accounts.

For those with an investing time frame of five years or more, money market funds may be a waste of resources anyway. Most people need significantly higher returns on retirement portfolios to reach their goals.

Do money market funds play a role in your retirement portfolio?

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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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