Don't Let the U.S. Government Manage Your 401(k)

Here in Minnesota, we have been without a state government for 17 days now.  During the same time period, we are also living through a much broader political stalemate that could be much worse financially than the “shutdown” of our state government. 

That is, the debt-ceiling debate currently going on in Washington, D.C.

The state of Minnesota budget collapse and state government “shutdown” never put your company 401(k) retirement plan account at risk. But a potential U.S. government debt default most certainly will.

A U.S. government default on its debt obligations is an unthinkable financial risk to the entire world economy.  In just 16 days, the U.S. government will not be able to meet payments on its bonds unless the U.S. Congress and President Obama make a deal to raise the current debt ceiling.

How would a potential U.S. default put your company 401(k) plan at risk?

First, the safety of the money market fund in your 401(k) would be in question. Money-market funds invest in U.S. government securities. If those securities “default” and stop making interest payments, you don’t have to be an economist to realize that every single money-market fund has a much higher risk than being a guaranteed investment.

Second, the past investment performance of every single mutual fund option in your company retirement plan menu is closely tied to the S&P 500. When Lehman Brothers Holding Company went bankrupt in September 2008, the S&P 500 index lost 43 percent of its value over the next few months.

If the entire U.S. economy is put at risk by a potential government debt default, the large U.S. companies that make up the S&P 500 are surely at risk also.

Third, imagine what would happen if U.S. interest rates rise suddenly. Rising interest rates mean falling bond prices. Falling bond prices mean that every “balanced,” “income,” and “target term” mutual fund in a 401(k) menu is at risk of losing value.

Last, the world economy has grown comfortable with the United States being the “banker of last resort” for any world economy that gets into financial trouble.  If the U.S. government puts the U.S. economy in financial trouble, are the other nations of the world going to be able to play that same role for the U.S. now?

Right now, you need to review the reasons that you currently hold every single mutual fund option that you own in your 401(k) company retirement plan account.  And make a game plan to preserve the principal in that account depending on the set of worldwide economic events come to pass over the next few weeks.

Don’t sit idly by and let the U.S. government potentially destroy your hard-earned 401(k) company retirement plan principal. The current members of the U.S. government can’t even agree on what is best for our country and for our economy. Don’t let them make the big investment decisions in your company 401(k) retirement plan too.

Ric Lager
Lager & Company, Inc.