From
Your Perspective:
Making sense of your 401(k) investments
Capital preservation
Your 401(k) will most likely include at least
one investment designed for
capital
preservation,
or stable value. Capital preservation
funds include guaranteed investment contracts (GICs), stable
value funds, and money market funds. If you put $10,000
into one of these funds, you can reasonably expect that
your investment will never be worth less than $10,000. The
downside is that they most likely won’t provide long-term
protection against inflation.
Guaranteed
investment contracts (GICs)
are insurance company products.
The issuer has the use of your money for the term of your
contract — usually one to five years — and pays
a fixed rate of interest in return. But the return on a
GIC is unlikely to outpace the rate of inflation, which
could leave you short of the income you’ll need in
retirement.
Money
market funds
invest in the short-term debts of corporations,
banks, and the U.S. government, and try to keep the value
of each share at $1. You earn interest, typically at a slightly
higher rate than you would get on an insured bank account.
And you can usually move money in and out of the fund without
penalty or loss of value. However, the funds aren’t
insured and may pay very low rates when rates in general
are low.
You
may face substantial penalties for switching money
out of a GIC, including forfeiting a percentage of
your
principal.
That’s because GIC assets are themselves invested
in fixed-income securities that provide a higher rate
of return than the insurer guarantees you. If the
insurer has to sell those investments to redeem your
principal, it puts the insurer's profit at risk —
a loss that’s passed on to you.
