3 Ways Cash Leaks Out of Your 401(k)

This is a very common practice barron of TX

A lot of companies will build cash into the fund's value so they don't have to constantly buy or sell a fund because of people taking loans, withdrawals, distributions, fund to fund transfers, etc. Since you work for a huge company, just think if everyone in the company got a contribution to a certain fund once every other week. That could potentially drive up the price of the fund. Or on the flip side, if a fund was sold by a large number of people on one day, it could drive the price down dramatically. Can you imagine $10-$30MM going into or out of a fund at once and what that would do to the valuation of the fund? That amount of money could be just your company alone. The plan provider, brokerage house, and fund company wouldn't want this type of swing in valuation so they build in a cash reserve they can use to put towards day to day trades. This is a very common practice and is why the value doesn't exactly match Yahoo. You are still getting the appropriate returns as anyone else would that is invested in the funds on an individual basis so you haven't lost any money. I imagine if you look at the summary plan description for your old employer, it will outline the process of calculating the value of funds.

I worked at JPMorgan dealing with retirement plans and valuation of funds daily and I would have to say a lot of companies we worked with included cash in the valuation of funds. It can be a little confusing but is a very common practice and I can see how those who don't deal with retirement plans daily could be confused. There isn't a conspiracy theory in the works...sorry

Jeff of KS @ Oct 20, 2009 13:11:10 PM