Debt Limit Decision Could Be A Big Deal to Your 401(k) Account Value

In progress now are negotiations on the “grand bargain” of a deficit reduction plan and debt-limit-increase deal between the U.S. Congress and President Obama. At stake is the solvency of the United States Government and the safety of its debt to the people who it owes money to.

In Minnesota, this political posturing seems like a repeat of the recent shutdown of our state government. For a couple of weeks, we could not buy a fishing license, visit a state park or get the tabs on our car renewed. 

I think that most Minnesotans thought that eventually things would “work out,” and that the state would be up and running again soon. It turns out that was the right approach to take.

The stakes are much bigger if the same “shutdown” take place in the U.S. Government.

Every company 401(k) plan participant in the U.S. is also an owner of U.S. government debt through their investments in the company retirement plan money market account. In addition, the majority of company retirement plan bond mutual funds own U.S. government bonds.

If the U.S. government does “shut down” or the rating on its debt is downgraded for the first time in history, interest rates may rise quickly. Rising interest rates means a drop in the market value of bond mutual funds.

If no “grand bargain” is announced in the next few days, the world’s stock markets could fall quickly and broadly. No stock mutual fund would be spared in a potential price drop in that event.

Take the time now to set a plan for the principal preservation in your company retirement plan account over the next few stock and bond market trading days.

I often tell my clients that, “If we can’t see our way clearly on what to do right now, then maybe it is a good time to sit on the sidelines.”

There is no one “game plan” to follow for every individual company retirement plan participant. Make the best decisions you can based on how a potential stock and bond market decline would affect your company retirement plan account in the next few days.

Ric Lager
Lager & Company, Inc.