Obama encourages savings
Within the last several days the President has encouraged Americans to save more by getting their tax refunds in savings bonds and making "opt-out" the norm for 401(k) plans. Is this a good idea for you?
Series EE Bonds earn .7% interest. You can probably do better with a bank CD or Money Market account. Maybe even a savings account.
By establishing an "opt-out" approach to participation in company sponsored 401(k) plans, the President is forcing you to take action to not have money from your pay check contributed to a company sponsored retirement plan. There are lots of advantages to participating in a 401(k) plan. You are saving pre-tax dollars (you don't pay taxes on the money you save when you save it).
However, you are usually offered a limited set of investment choices as selected by your plan (employer). These usually include a variety of mutual funds and a money marketmutual fund. Seldom does it include investments in bank CD's.
Why is that important? With mutual funds you are investing in the stock market. Thus you are subject to the whims of the market and the expertise of the portfolio manager.
You won't have the security of a government insured CD that can be obtained from a bank. As far a I know, only one 401(k) plan administrator offers CD's as an option in a 401(k) portfolio. That is Pentegra. Funny thing is they were originally set up to handle the 401(k) accounts of the Federal Home Loan Banks in 1943. Maybe they knew that CD's were a more secure investment than anything else.
The point of this commentary is that if you are encouraged to join a 401(k) plan then press your employer to provide one that offers a safe and secure investment alternative, such as CD's.
If your over 59 1/2 years old you can also ask if your 401(k) plan allows withdrawals over this age. These can be taken without penalty as long as the funds are then moved into a traditional IRA. The IRA will now allow you to invest in federally insured CD's and remove the risk of principle loss to a volatile market.
