401k plans are retirement plans that are set up through your employer. These plans allow you to invest in a variety of mutual funds. Many of these funds are equity funds, meaning that they invest in stocks. But some of the funds are fixed funds or funds that pay a stable rate of return that is considered "low risk."
One purpose for moving your money into a fixed-income investment in your 401k plan is to keep your money invested for a short period of time while you decide how you want to invest your money for the long-term. Another purpose for moving your money to a 401k plan is for diversity. A fixed-income account provides security for part of your money in your 401k, so that you may risk some of your money in equity funds, while retaining some of your money in a fixed account that can't be lost.
To move some of your money to a fixed-interest account, contact your 401k plan administrator and request an allocation form. You may reallocate your 401k investments at any time. Fill out the paperwork, allocating the percentage of your investments you want in fixed-interest investments in your 401k plan. Then, sign the form and turn it in to your plan administrator.
The benefit of moving your money to a fixed-interest investment in your 401k plan is that you won't lose any of the money that's in the fixed-interest investment. This gives you safety and a steady return on your investment principal not available from equity investments.
If you move too much of your investment principal into fixed interest, you may significantly decrease your overall return from your 401k. Fixed investments may also trail behind the rate of inflation. If this happens, then the real value of your 401k plan will decrease over time. This, in turn, leaves you without enough money to live on during your retirement.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- "Ernst & Young's Personal Financial Planning Guide, 5th Edition"; Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004