How to Narrow Down Your 401(k) Investment Choices

If you’re looking at the investment options available in your 401(k) and you’re overwhelmed by your array of choices, consider yourself lucky. Many 401(k) plans offer very limited investment options and some encourage participants to invest heavily in the shares of their own company.

You might not feel lucky, of course, as you scroll through the endless list of funds available to you. Fortunately, there are several ways to narrow down the options. This process mainly involves carefully considering your risk tolerance, your age and how to minimize the fees you pay. After making investments that are not suitable for your walletyou should end up with a manageable list.

Key points to remember

  • The range of options available in the average 401(k) plan can be daunting, but there are ways to narrow your options.
  • First you need to decide on the level of risk with which you are comfortable.
  • This will depend on your age, as older investors should be more careful in their choices.
  • Next, eliminate any funds that charge high fees.
  • Finally, make sure your portfolio is well diversified and resist the temptation to overmanage it.

How to choose investments for your 401(k)

First, some basics. When you look at the investments in your 401(k), you’ll probably see mostly mutual fund, which are the most common investment options offered in 401(k) plans. However, some plans are starting to offer exchange-traded funds (ETFs). Mutual funds and ETFs contain a basket of securities such as actions.

All of these funds can be placed on a range from low risk, low return funds to high risk, high return funds. The terms used by mutual fund managers, however, are a little different. Most common is to see funds described as a range from conservative to aggressive, with many ratings in between. Funds can also be described as balance, assess, or moderate. All major financial companies use similar wording.

You don’t have to choose just one fund. Instead, you could spread your money across multiple funds. How do you allocate your money or your asset allocation– is your decision, and it can get complicated. Many gurus will claim that their allocation formula is the best, but in reality, building a strong and successful portfolio comes down to four things: risk, your age, fees and diversification.

Risk tolerance

When choosing investments for your 401(k), your first and most important decision is the level of risk you are comfortable with. This consideration is very personal and is known as your risk tolerance. Only you are qualified to say if you like the idea of take a flyer or prefer to play it safe.

Essentially, you want to choose the riskiest investments that you are comfortable with, as these will provide the best opportunities for growth. If you don’t want to take big risks with your retirement savings – an understandable sentiment – ​​ignore any funds described as aggressive, growth or specialty.


Your next consideration should be your age, which will also impact your risk tolerance. Specifically, the number of years until retirement can affect your risk tolerance. Indeed, it is often claimed that a younger person can invest a higher percentage in riskier stock funds. At best, the funds could pay off big. At worst, there is time to recoup the losses since retirement is not imminent.

Then, as you approach retirement, you should gradually reduce risky fund holdings and shift to Safety areas. In the ideal scenario, you’ve stashed those big upfront wins somewhere safe while adding money for the future. It is the basis for target date fundwhich can be a good way to automate your asset allocation.

A number of formulas are used to calculate the degree of risk a person should have at different stages of their life. However, the traditional guidance is that the percentage of your money invested in stocks should equal 100 minus your age. More recently, this figure has been revised to 110 or even 120 because the average life expectancy increased. On a basis of 120, a 30 year old would invest 90% of their portfolio in stocks, while a 70 year old would invest 50%.

This advice can further narrow down your investment options. If you’re young, the standard approach would be to ignore the more conservative investments offered through your 401(k), and vice versa.

Target date funds can be a good option for retirement accounts. These funds offer diversified portfolios that automatically become more conservative over time as you approach retirement.


The two factors we have considered so far relate to risk, which is an inherently personal consideration. An investment’s expense ratio, on the other hand, is an objective measure of the cost of owning it.

Managing your 401(k) generates two sets of bills: plan expenses, which you can’t avoid, and finance charges, which depend on the investments you choose. When Choosing Investments for Your 401(k), You Should Avoid Funds That Charge High Fees management fees and selling costs. Actively managed funds are those that hire analysts to do research on securities. This research is expensive and drives up management costs.

Index funds generally have the lowest fees because they require little or no hands-on management. These funds are automatically invested in shares of the companies that make up a stock market index, such as the S&P500 or the Russell 2000and only change when these indexes change. If you opt for well-managed index funds, you should pay no more than 0.25% annual fee.

In other words, once you’ve decided on your risk tolerance and eliminated high-risk or low-return funds, you next need to eliminate funds that charge high fees.

High fees can make a huge difference to your eventual returns. According to an American study Ministry of Labourinvestors can lose tens of thousands of dollars over their lifetime if they pay 1.5% fees instead of 0.5%.

To diversify

At this point, you have hopefully narrowed down the number of appropriate 401(k) investments to a much more manageable number. The next, somewhat counter-intuitive step is to choose a variety of remaining investments.

You probably already know that it makes sense to spread your 401(k) account balance over a variety of investment types. Diversification helps you capture returns from a combination of investments—actions, obligations, goodsand others, while protecting your balance against the downside risk of either asset class.

Once you’ve decided on a tolerable level of risk, made sure you’re not paying high fees, and spread your money across multiple asset classes, the trick is to wait. You should fight the temptation to try to time Where outsmart the market or trade too often. Review your portfolio periodically, perhaps once a year, but try not to micromanage: your best ally in building a good retirement portfolio is patience.

What is the safest 401(k) investment?

Can you lose money in a 401(k)?

Yes. Since your 401(k) will be invested in various assets (eg, stocks, bonds, etc.), your portfolio will be exposed to market risk. If the stock market crashes, the equity component of your portfolio will also decline in value. That’s why you should put your money in safer investments as you approach retirement.

What can I add to my 401(k)?

The essential

The range of options available in the average 401(k) plan can be daunting, but there are ways to narrow your options. First you need to decide what level of risk you are comfortable with. This will depend on your age, as older investors should be more careful in their choices. Next, eliminate any funds that charge high fees. Finally, make sure your portfolio is well-diversified and resist the temptation to over-manage it.