Hi,
I think a clear definition of 401Ks might help to clear up the misconception of some investors that they are guaranteed to retain their contributions.
It is a tax-deferred retirement savings plan often offered by employers on a shared employee-employer basis. The savings are invested mostly by employers and deferred from current income taxes on savings and earnings until withdrawal. The employee elects to contribute to the 401K.
A 403(b) is a tax-deferred plan for nonprofit organizations like public schools and municipal agencies and follows the 401 K rules and payroll deductions as above but funds can be withdrawn at age 59 without penalty and must be withdrawn by age 70. Funds can also be borrowed. Investment choices are more limited, safer, and often funded as annuities although some may be put in not so safe mutual funds because it's up to the employer, who may or may not be a contributor.
Unfortunately, what is unclear to many of the folks involved is that the funds are not FDIC (Federal Deposits Insurance Corporation) insured because they are invested funds. The FDIC covers IRA (Individual Retirement Accounts), Section 457 deferred Compensation plan accounts, self-directed defined contribution plan accounts, self-directed Keogh plans. But sorry not 401Ks or 403(b)s.
Annuities CAN be safer (unless the underlying company is plundered) than mutual funds or other more risky investments. The 401s and 403(b)s that are placed to generate more income are subject to the downturns in the market. If the more risky investment in which the 401K or 403(b) is placed goes belly up, retirement savings are GONE. All can be lost or if it is a diversified fund a portion MAY BE lost.
Many folks with these savings believe that they can't lose what they have invested. Sorry, but this is not true. These are not insured plans and are essentially invested in the stock market with all the ups and downs that means. Although more care has been placed in making retirement funds safe, there are no guarantees that someone managing the annuities or mutual funds won't get a wild hair and include some of the "bungled and bundled,and bombed out" hedge funds to try to boost income.
Unfortunately in acquiring wealth there is risk. To save for retirement with LESS risk, invest money where the FDIC insures it for up to $250,000. per person account.(UNTIL 2013 THEN A LOWER AMOUNT). Save in the above named FDIC accounts or a savings account which NOW pays almost nothing or even Government backed CDs or T-bills. This kind of security IS based on the government's ability to PUT ITS MONEY WHERE ITS MOUTH IS!
An account like the 401K and the 403(b) carries with it conveniently enforced savings, employer selected investments (some allow you to pick and choose), outside management, tax advantages, PLUS RISK.
As advised in Post 20, no one takes better care of personal finances with an incentive of protecting the future than "numero uno". Leaving it to an employer, his investment broker, and a random selection of equities is like playing RUSSIAN ROULETTE (one bullet in gun, spin the chamber, aim at head, and if lucky win, or if not lose life) Not a good option.
403(b)s are often a little better funded but to believe there is no risk to contributed money is a fallacy even though low in risk. If the employer allows input into a personal choice of investments, there is more control. Since annuities are mainly obtained through insurance companies that will provide stability as long as the insurance company remains viable. Annuities are very complex.
Just remember AN INVESTMENT CARRIES THE RISK OF LOSS. Don't assume (our favorite word) that your money is NOT at risk and you don't have to look after it. If that frightens you, transfer it to an insured IRA or the like and get more protection!
CHEERS, CONNIE
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