What if Pimco's Total Return is in your 401(k)?

The world's biggest bond fund, the Pimco Total Return fund, has recorded the largest outflows of assets in history in one week when its shareholders withdrew over $23.5 billion. This massive withdrawal came on the heels of news that its star manager Bill Gross unexpectedly left Pimco.

Long revered as the Bond King, Gross became famous for a long career of making the right calls on the direction of interest rates and bond market moves. He was a founder of Pimco and was at the helm of the Pimco Total Return fund for over 27 years. His departure was a surprise to many industry experts and was followed by rumors of erratic behavior leading to his dramatic and sudden exit from the firm on Sept. 26.

This move is important not only because it created a crisis in confidence at Total Return, triggering redemptions of over 10 percent of the fund's assets, but it also because it affects millions of individual investors' 401(k) accounts. Total Return is one of the most widely owned funds in employer-sponsored plans.

If you have a 401(k) account, you should check it today to see if this you own this fund. If so, here's what you need to know.

If you do own this fund, the decision to sell or hold is simple: Sell it.

First, I'm reluctant to stick with a fund whose management suddenly bolted with no clear succession plan in advance. New management will need some time to stabilize and work through a new investment decision-making process.

Major pension consultants agree. Mercer Investment downgraded its ratings on five Pimco funds immediately following Gross' departure. And several pension plan sponsors, including the Texas Municipal Retirement System, have placed Pimco on their watch list.

More redemptions are likely to follow. The problem is that most 401(k) participants have access only to bond funds, and as investors sell their shares, the fund is forced to sell bonds it owns to raise cash for these redemptions, which in turn can push down the value of the bonds and the fund's shares.

Finally, since 401(k) plans are tax-deferred, you don't realize capital gains when you sell a fund, so capital gains taxes aren't an issue. Also, this fund is typically offered in 401(k) plans with no loads or redemption fees.

If you do sell your Total Return holding, here are a few alternatives to consider buying:

If your plan offers a stable value fund, consider it instead of a bond fund. Stable value funds are typically managed by a bank or insurance company that pays a low but fixed interest rate and promises stable principal value.

If your 401(k) doesn't offer a stable value fund, then look for a bond fund with a low "duration," or average maturity of its bond holdings, of less than five years. Short-term bond funds generally hold up better during the time when rates are rising.

Finally, many 401(k) plans offer the option to open a self-directed brokerage account, which offer access to a wider variety of funds. If your plan doesn't offer a stable value fund or a short-term bond fund, consider opening a brokerage account in your 401(k) and transfer the proceeds of your Pimco sale to the brokerage account to allocate to a suitable alternative.

Brokerage accounts in 401(k) plans offer thousands of additional fund choices, including a wide variety of stock and bond funds, and in some cases, access to individual stocks and bonds.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.