Do you have cash equivalents sitting in either your 401(k) or other retirement accounts? If you do, you’re missing out, not only on safe opportunities to make money, but also on the chance to keep even with inflation.

Clarence Kehoe, an executive partner at accounting firm Anchin, Block & Anchin, which specializes in auditing 401(k) plans, says one of the things that disturbed him during this year’s round of audits was the number of participants who have funds in cash accounts such as money market funds. He understands this kind of thinking. “There is enormous fear of a market drop. Stocks are high and continue to rise. Bonds are problematic. When people look at Detroit and other cities, they see potential liabilities. By default, they say, ‘I’m going to put this in cash.'”

While stashing funds in cash might arguably be an acceptable retirement planning strategy for a saver older than 80, for those who are growing their retirement accounts in hopes of retiring comfortably or those with a long way to go until retirement, it is a lousy idea. Kehoe points out that the rules and regulations prevent 401(k) administrators from telling participants with a large allocation to cash that they are making a big mistake, but as an independent CPA, he can safely say, “Putting money in a cash account isn’t a sound financial strategy.”

Kehoe thinks the best idea is a well-diversified portfolio, with money in stocks, bonds and a strategic amount in cash. But if you insist on a large allocation to cash, he says stable value funds are your best bet at this point because, “People are getting some returns from stable value — 1 percent to 2 percent — compared to no returns from money market funds.”

Stable value funds are short- or medium-term bonds paired with insurance contracts to achieve a specific minimum return. As long as interest rates stay low, they’ll be the better choice, Kehoe says. But inevitably interest rates are going to climb — maybe next year or maybe in 2015. When that happens, moving to a money market fund could be a good idea because money market funds are much more sensitive to increases in interest rates.

Stable value funds usually have “equity wash rules” that limit transfers to money market or short-term bond funds. Participants may have to first move their money to an equity fund for at least 90 days. Having both a money market and a stable value fund might give you more flexibility. In any case, if you have a large allocation to cash, keeping an eye on interest rates is important. Don’t pay more than you have to for a sense of safety.

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