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Is insuring a 401(k) a safe bet?

By Jennie L. Phipps ·
Wednesday, November 24, 2010
Posted: 9 am ET

Prudential Retirement, which manages 401(k)s for 3.7 million employees, announced this week that it is adding an FDIC-insured savings option to its plans. The Federal Deposit Insurance Corp., or FDIC, insures bank checking and savings deposits up to $250,000 in most circumstances.

The FDIC doesn't insure the sorts of investments most likely to be found in 401(k)s, including money invested in stocks, bonds or mutual funds. Carlos Mello, vice president of Prudential Retirement, says this is a first for his company and an unusual offering in the industry. He says Prudential added the FDIC-insured option in response to numerous customer requests. "It has broad appeal for people who are concerned about safety," he says.

Is putting your money in an FDIC-insured account a wise retirement planning choice in this financially unsettling world?

Mello says that Prudential doesn't offer any investment advice to its clients, but does see the insured account as worthy of consideration for someone approaching retirement who wants to have cash on hand once he or she retires and starts to regularly withdraw money for living expenses. Mello also sees it as a good alternative to money market funds and short-term bonds for those who want to park cash while evaluating other investments. "It offers liquidity, principal protection and a competitive rate of return," he says.

There may be a place for this kind of investment, but for many people being too concerned with safety when they are saving for retirement is a huge risk, because the kind of low-return "safe" investments that the FDIC insures don't keep up with inflation. After 20 years of 3.5 percent annual inflation, a dollar will be worth half as much as it used to be. That's a much worse bet than the ups and downs of the market.

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