Last time I went through the basics of what 401(k) plans are and how they work. This time, I’ll be focusing on how to evaluate the investments available in your plan.
How do I invest the money in my 401(k)? This is my process for evaluating the funds:
- Target-date funds: You’ve probably seen funds called “Target Retirement 2040” or something like that, and these are target-date funds. I’m not a fan, because these funds slightly reduce your target return and volatility every year. I like to keep people at a constant level of return and volatility at least until they’re ready to retire, or we are leaving potential returns on the table. But if you are just NOT into this fund-picking process, it’s easy to choose one of these funds and let it ride. It’s not bad, and it’s simple.
- Investment Management companies: Some 401(k) plans offer professional management of your money for an additional fee, above and beyond what you pay for the account. It’s worth checking into the cost of this option and seeing what they offer before you sign up. If you feel they are adding value it may be worth the cost.
- Or choose the individual funds yourself:
- A word about index funds: as you do this exercise you may notice that some of the funds are A LOT less expensive than others. These are index funds, which means the fund is built to simply track a market index like the S&P 500 or the MSCI International Index. Index funds are subject to the same general risks as the stocks they contain.
I walk people through this exercise when I do financial planning, so leave your comments and questions below on the comments!