If you go and dig up my posts from mid-2008 you will see that I was saying to get out of ALL paper assets
Leaving $$$ in a 401K, regardless of whether the $$$ are sitting in equities or a cash fund, leaves an investor in paper
Part of the strategy here is to eliminate as many middle men as possible that are sitting between you and your $$$ – it is impossible to tell at this point which bank / brokerage / etc is going broke next so the only defense is to get out of them all
Yes, I am aware of FDIC and SIPC protection – I am also aware that both of these programs are horribly underfunded – they operate under the principle that only a few percent of the total amount of investors will ever need to be bailed out at the same time – in a widespread meltdown both of these programs would be overwhelmed and would likely start issuing certificates with maturity dates sometime in the future (sorry your bank lost your $250K – here’s a cert that matures in 2015 covering your full loss) – anyone needing cash today for one of these certs would probably be able to get 60-70% of face value
IMO about 70% of the current world of paper assets are going to disappear in the next few years – equities, bonds, annuities, etc – this paper sits in 401Ks, IRAs, pension funds, retirement accounts, college investment funds, etc – we’re already well on our way with the trillions of dollars of stock and real estate equity that have disappeared
One of the keys to successful investing is being able to sleep at night – if you can sleep comfortably with your $$$ sitting in paper then continue to do so – if you’re comfortable with the guarantees provided by FDIC and SIPC, more power to you – I’m not comfortable in paper right now so I have minimized my exposure to paper investments
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Yes, the penalty for early withdrawal is 10% – the proceeds from the 401K are then taxed as regular income
