While there are a wide array of investment accounts available to investors, one of the most common for employees is the 401(k). This account, which is the hallmark of the defined-contribution retirement plans that most employers provide, allows investors to make retirement contributions on a tax-deferred basis and direct the investment of those funds.
- 401(k) plans do provide interest-bearing options in the securities in which they invest funds.
- Interest-bearing options in a 401(k) include CDs, money market funds, U.S. treasury bonds, and corporate bonds.
- Many employers offer matching funds to their employees' 401(k) accounts, which essentially is free money for the fund.
Though the range of investment options available in a 401(k) varies from plan to plan, there is nearly always an interest-bearing option available. The following are some of the most common types of securities that generate interest income for 401(k) owners.
Types of Investment Accounts
Certificates of Deposit
These securities, frequently referred to as CDs, are issued by commercial banks and pay a preset rate of interest over the term of the agreement. The Federal Deposit Insurance Corporation (FDIC) often acts as a guarantor of these securities, which makes them quite attractive to low-risk investors.
Money Market Funds
These funds seek to generate returns by investing in short-term securities, generally those with terms of less than one year, that relate to the money market at large. While returns from money market funds can involve an element of capital gain, proceeds from earned interest are the primary component.
401(k) plans do provide interest-bearing options in the securities in which they invest funds.
U.S. Treasury Bonds
Long regarded as one of the safest investments in the world, U.S. Treasury bonds (T-bonds) provide investors with recurring, semiannual interest income through direct ownership or a mutual fund. It is worth noting, however, that investors only earn a bond’s yield to maturity if the bond is actually held through to maturity.
Like U.S. T-bonds, corporate bonds provide investors with recurring interest income. However, the default risk associated with corporate bonds varies significantly by the issuer. Because of this, investors need to conduct a thorough review of any corporate bond security prior to investing directly or through a mutual fund.
Advantages of an Intertest-Bearing 401(k) Account
The maximum contribution an individual can make to their 401(k) account in 2020 and 2021 is $19,500. If your employer offers even a 1% match on your contribution, that can mean substantial growth in the long-term thanks to compound interest. The gains you see are interest gains on interest and are considered the gold standard of responsible and intelligent investing.