A lot of folks are looking for “safe” ways to invest 401(K) in cash, thinking that it has to be safer than stocks, right? Well, not necessarily. Let me explain and then show you ways to invest in cash or cash-like vehicles.

If you don’t know how to invest, ANY form of investment is risky for you! The bottom line is, if you don’t learn to invest money whether in stocks, bonds or cash, you are taking chances you aren’t aware of. So, before buying investing in cash in your 401(K), let’s talk a bit about what they are.

Moving to a cash investment is a way to be safer, because various investments are insured, or are invested with the US Government. Remember though, to get a safe investment, you are usually losing the high returns that only come with risk. Returns like 8% and up are not easy to find, in safe vehicles, although what you believe is “safe” will differ with every person. So let’s look at a couple “safe” cash-like investments.

First, there really isn’t any investment that is as safe as having cold hard cash in hand. It’s ready when you need it, you don’t have to worry about being able to get your money in an emergency. However, as inflation rises, the value of your money also goes down. If there is an inflation rate of 5%, and you don’t keep your money somewhere it can earn at least that 5%, your money is suddenly only worth 95% of what it used to be. So, cash is safe, meaning you won’t lose the bills themselves, but you will start to lose value.

Where can you put money to earn a good rate of return, that’s as safe as cash? A savings account, insured by the FDIC, meaning the US Government, is an account that is insured up to $250,000. This just means that if the bank holding the account fails, the Federal government will make sure you are repaid. Right now, though, the interest rate being paid is very low, between 0.25% and 1.5%, unless you have $5,000 to invest. Even then, you won’t see rates much over 3%. Remember – You are getting SAFETY so you are not getting HIGH RETURNS.

Most 401(K) plans offer some kind of savings account option, usually intended for employees who are nearing retirement and want to play it safe, but anyone can choose these as an investment.

Beyond savings accounts, there are money markets funds. some of these funds are covered by FDIC insurance, or other types of federal insurance, but not all of them are. In addition, not all 401(K) plans offer this option. A money market account usually pays slightly higher than savings accounts, but minimum balances may be required. Compare this type of account to the savings option, and be sure to ask whether the deposits are insured.

The next type of cash-like investment is bonds. Bonds are a little confusing. Basically, though, a bond is like a loan, where your a lending money to a federal, state or local entity or a corporation. Bonds have ratings, which are supposed to tell you how safe they are, however recently we’ve learned that not all ratings are to be believed. Triple “A” rated bonds, “AAA”, are the safest, with pluses, and minuses, down to “C” rated bonds, which are the lowest, and called “junk” bonds. While these may be junk, they also pay the highest returns.

So which bonds, if any, are safe? It’s often thought that Treasury bonds are safest, since they are backed by the US Treasury. China thinks so; it’s how they lend us all that money. however again, really safe means really low return. Right now, returns on treasury bonds are under 3%. how about other savings bonds?

There are also mutual funds and ETFs that let you invest in what are called inflation indexed bonds. These are bonds issued by the US Government and the return changes as inflation rises. These can be bought individually from the Treasury, however by buying a mutual fund or ETF which invests in these bonds, you are more easily able to buy and sell without owning the bond itself. Remember that if you own the bond, it has the backing of the US Treasury, and you are insured from loss, however a fund or ETF investing in those bonds does not pass along that insurance to you. This adds a little additional risk there.

Returns for these types of bonds are, as of this writing, around 5.5%, and the funds trading in these bonds are currently returning anywhere from 4% to 6% interest. This is a better way to have your money in relatively safe vehicles, while getting a better return and additional liquidity for your investment.

There are many other bond options, which are very detailed, and too long to go into here, but here is a list of some of the kinds of bonds you can explore and ask about:

- Federal Agency bonds
- Municipal (state and local government) bonds
- Utilities (raising money for public utilities)
- Corporate bonds (corporations raise money from private investors – bondholder)

The bond ratings will determine the rate of return. Risky, or low-rated bonds will pay you a higher return, even as much as 14-15%, however there is a greater risk that the entity will default and you can lose your money. Buying these inside a bond mutual fund or ETF means you are buying a more diversified basket of bonds, so th risk may be lower. Generally, within a 401(K) account however, it is unlikely that you will see either ETFs being offered (they don’t collect enough fees for the broker) or higher interest, high risk bond funds (too risky for your employer, since they don’t want to be blamed if you lose money).

Since the stock market crash in 2008, many brokers including discount brokers are making a lot more information available about bonds. We like TradeKing and use it ourselves, for all the discussion forums, and educational materials teaching you how to invest. Many brokers have educational materials, easy screens to help you find and purchase the right bonds for you, with acceptable risk for your risk tolerance level. If you have any question about details of a bond purchase, including ratings, fees, minimum investments, or whether something is covered by federal deposit insurance, do not hesitate to ask your broker or get more information before investing.

This is just a beginning as you learn to invest money, and where to invest your 401(K) in cash, to have a bit more safety than all stocks.