Should I Move My 401(k) Money Into Fixed Income?

According to the IRS, the 401(k) is one of the permitted tax-advantaged accounts that employers can offer their employees. If you are an employee, you can contribute a portion of your earnings into such accounts to allow your investments to grow tax free. And depending on whether you invested in a traditional or Roth account, you can reduce your taxable income now and pay later, or pay taxes now and withdraw your qualified distributions tax-free later.

The Financial Industry Regulatory Authority (FINRA) states that 401(k) plans offer various types of investments, with most providing at least three options. Typically, most employers will offer assets such as mutual funds, variable annuities, guaranteed investment contracts (GICs), company stock or stable value funds. However, the combination depends on the plan sponsors (employer) and provider.

Can your 401(k) lose money? It can. Not every type of investment available via your 401(k) plan is stable. Many investments like company stock, variable annuities and mutual funds are subject to market conditions.

For example, suppose you invest in company ABC's stock with a ​$8-per-share​ value, anticipating the company stock will perform well over time and you could sell them at ​$13 per share​. However, at the time of withdrawal, due to a company embezzlement scandal, the shares fall to ​$2 per share​.

In that case, if you had ​1,000 shares​ of that company stock, you would have spent ​$8,000​ at the time of purchase, and made ​$2,000​ at the time of sale, losing ​$6,000​ in the process. Plus, that doesn't take into account all transaction fees you may have to pay.

You may be wondering, “Can I stop my 401(k) from losing money?” Yes, you could, if you make all the right moves. It is possible to move your 401(k) into fixed-income investments that, at the very least, protect your initial investment. Several guaranteed income funds in 401(k) plans exist.

If you are willing to move out some money from a 401(k) to bonds, you can invest in U.S. savings bonds, which usually protect the capital but offer lower interest rates. The government Investor website describes them as debt securities that are, “backed by the full faith and credit of the U.S. government.” As a result, they are some of the most stable investments available.

It is also worth noting that U.S. savings bonds usually grow tax-deferred. You won’t have to pay any taxes on the interest earned until you redeem the bonds. And according to TreasuryDirect, they are also exempt from local and state income taxes. In the meantime, your earned interest will accrue and compound, raising the value of your total earnings, without compromising your initial investment.

It is worth noting though, that it is generally impossible to purchase U.S. savings bonds via your 401(k). Withdrawing your money from the retirement account may attract taxes if you don’t follow the IRS withdrawal rules. However, you can invest in high-grade corporate bonds via the employer-sponsored account. They tend to be low-risk.

According to the Financial Accounting Standard Board (FASB) definition, a GIC is an insurance company contract that guarantees you a minimum return on your investment (ROI) over a specified period, in exchange for lending your 401(k) money to the insurance company for a specified time. That ROI must include the principal and the specified interest.

However, while this type of investment is fixed income, you could still transfer money out of your 401(k) account at contract value if you fulfill the set conditions, such as when you qualify for financial hardship.

Typical GICs are short-term investments that are pretty stable, but they pay a low interest rate. In addition, they are backed by insurance companies instead of the government. But they are worth considering if you are not sure what to do with your 401(k) funds in the long term and need time to think, and the insurance company is stable.

Forbes describes stable value funds as a cross between bonds and money market funds. They consist of a portfolio of investment assets that are insured against market losses. So, regardless of the state of the economy and performance, your capital will be preserved.

Since stable value funds are often available via 401(k) plans, you don’t have to withdraw your money from your retirement account and risk paying taxes and fines. You can invest in the short and mid term as you approach retirement or to readjust your portfolio to something less risky. But remember, they usually earn low interest.

The government Investor website describes CDs as fixed savings accounts that enable you to lend money to a financial institution in exchange for interest. The duration of this arrangement could be as short as ​one month​ or as long as ​10 years​​.​ But at maturity, you will receive your principal and interest earned.

If you purchase CDs through a federally insured bank, your money will be insured to the tune of ​$250,000​. So, even if the bank you entrust your money to goes broke, your investment is protected. Also, the interest rate is usually fixed, so you know how much to expect.

Therefore, you can transfer some of your 401(k) monies into a CD. But you should ensure you partner with an FDIC-insured bank to keep your investment safe. In addition, keep in mind the tax consequences of moving money out of a 401(k).

You can move your 401(k) funds into a fixed-income account by contacting your plan administrators and requesting for a transfer or allocation form. However, you need to remember that even though fixed-income accounts often offer capital protection and stability, their interest rates are usually lower. So, you may make less money investing in these kinds of assets than you would in higher-risk ones.