How To Protect Your 401k From a U.S. Government Default

A 401K may have limited investment choices, so it may be difficult to find something to invest inside the 401K that will protect your money from a Treasury debt default. Many 401K's offer only a few equity mutual funds and two bond funds, with no way to invest in gold or foreign currency.

One Scenario

One possible but weak solution would be to invest in a short term investment grade money market mutual fund or a “Guaranteed Income Fund” (GIC) offered inside of many 401Ks. Even those are risky. When Lehman failed a prominent money market fund lost 3% of value. And when some employers failed then the GIC’s in 401K’s also lost value.

A GIC is a contract by an insurance company to provide a bond like investment where they guarantee the principal. The problem is that the insurance company can go bankrupt thus ruining the “guarantee”. So watch carefully when someone says “guarantee”. The insurance company should have an “AA” or higher rating to make their “guarantee” a reasonable bet. That is all it is, a “bet” that the insurance company will remain solvent. You have no guarantee of the “guarantee”!

A Potential Strategy

One hypothetical strategy that is too risky to recommend is to buy a futures contract on gold that is equivalent to the amount of your 401K assets. Then if gold goes up during a crisis that might offset the damage caused that a crisis did to your 401k. But I do not recommend it because gold has behaved in an unreliable manner and could go down and if coupled with the extreme leverage of a futures contract then you could go bankrupt, so please don’t do it.

There is no guarantee that gold will go up in lockstep with a decline in the dollar. Gold could have been overpriced due to emotions of other investors and thus gold could go down. There is some reason to believe that a fair value for gold is between $750 to $1,000, so it may be overpriced at $1,600 today. During the 1970’s it went down 50% in 1975 and then in 1980 it went down 50%. Since futures contract are leveraged up about 20 times the initial deposit then you could lose 10 times your investment if gold futures dropped 50%.

Fortunately most people change jobs every few years at which time they can roll over their 401K to an IRA where they have a huge amount of freedom of choices. Always ask your employer if they allow a “brokerage window” in a 401K that allows you to buy any publicly traded investment even though it is in a 401K and ask if they allow “in-service” withdrawals where you can roll it to an IRA. Never do a distribution of the money from a 401K directly to you, instead tell the new broker that will hold your IRA that you want him to pull the funds from the old 401k and roll it to the IRA. If you withdraw funds from a 401K by having a check payable to you then it is taxable transaction and probably can’t undone.

About the author

Don Martin, CFP®


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  • I feel many of us are in the same boat as Peter is that how can we really protect ourselves against a market downsurge or crash? Maybe you can forward your answer you gave to him to me because I understand his question and it is the same as I have. Is there a what he called a stop gap to protect the hard earned money we all invest in 401k’s and have stock brokers, super computers and those with the inside edge from stealing all our hard earned savings? thanks so much

  • Hello Don, my wife has a 401K and is still employed, her age is 46. I am so very concerned about losing the $$ in the 401, as I am disabled and the 401 is the only money we have for our retirement. We currently live paycheck to paycheck just trying to get to the next month and have been living this way for at least 10 years. I know nothing about investing but am trying to learn what I can. My question is two fold. First, has to do with in service rollover into a IRA. Please bare with me as I try to explain this. With the money put into the 401, the money buys a certain amount of stock funds at one price. Now that the economy is crashing, the worth of the stock, funds , is going down. Is it not the case that to do a rollover, the stock, funds would be sold at a lower price than what we paid for them. {this assumes that the stocks funds have lost value because of market trending downward} .So then the 401 would take a major loss in value due to having to sell off those investments at a lower rate than what we paid for them, right? Or am I not understanding this? The other question is what in the heck can we do to protect our 401 from being wiped out? Is there some way to just take the total worth of the 401 {currently @ $75,000} and divest ourselves of the stock market and just set the money aside somewhere so it won’t be tied to the market? I keep reading horror stories of peoples entire retirement savings in their 401 just wiped out completely and now left with nothing. There has to be something that can be done. It’s our money we contributed from my wife’s paycheck for the last 10 years. I just can’t imagine that we have to just sit by and watch the value go to 0 and can’t do anything about it!!!! This is tantamount to getting robbed!!! I mean what kind of stop gap measures did the government put in place so peoples entire savings would not be lost and those peoples can’t do anything but just stand by??
    Sorry for going on, but any help you could offer to my wife Luba and I would be so very much appreciated. We are becoming frightened that everything we have, our home, our retirement savings have a real possibility of losing everything and I just can’t let that happen to my wife. As mentioned before, I am disabled and Luba is going to be around a lot longer than I am and I need to know that she is going to be able to have a home and enough savings to live without worry. I do thank you for any advice you could offer, and if not, I do thank you for at least reading this letter and we wish you the best.

    Best regards

    Peter Efseaff

    • Invest in ETFs and protect them with a stop loss order trailing at 5 to 10%. Update order monthly to adjust the trailing percentage to absorb any gains. this will limit your losses to the 5 -10% sell of to a cash holding brokerage account until market starts going up and you can buy back in hopefully lower than you cashed out at. making getting back to the original sell point a profitable endevor

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