How to choose the right 401(k) investment fund?

Chris Reddick |

401(k)s for retirement savers are extremely important especially for those in corporate careers as they are one of the best vehicles to fund your retirement. Americans have $6.3 trillion invested in these tax-deferred workplace savings accounts. There are more than 58 million active 401(k) participants.1

BrightScope, a financial-information company that rates retirement-savings plans, lists the 100 most popular mutual funds in 401(k) plans based on funds' 401(k) assets under management. These popular choices include index funds from Vanguard and Fidelity holding the top two spots on the list.

What is a 401(k)?

Investing in a 401(k) is one of the main ways corporate employees build up savings for retirement.2 The tax-advantaged status and automated contributions make it a particularly valuable financial instrument, and those who can start investing early are more likely to end up saving a substantial amount to fund their retirement.

Types of Funds

The most common funds in 401(k) plans are target-date funds and different asset classes of mutual funds. The target-date fund moves from having mostly stocks in the portfolio, riskier assets, to bonds near retirement that have less risk. The idea is that when you are further from retirement you can take on more risk. The benefits are that target-date funds are globally diversified and typically low cost.

Another option is to do it yourself by picking 2-5 mutual funds to match different asset classes such as US stocks, international stocks, and bonds. The benefit of choosing individual funds is that you will save a little more on fees, but the cost is that you may need to rebalance the funds on an annual basis.

How to Pick Investments

Risk tolerance: The first thing to consider is your view on risk. Many online tools can be used such as the Vanguard Risk Tolerance Survey. You can take this survey and it will give you an indication of how much should be allocated to stocks and bonds in your investment portfolio.

Choice of funds: As mentioned, the two most common funds are target-date funds where you match the fund to your retirement date and asset class funds such as large-cap US stocks, international, and bond funds. You just keep contributing towards the same fund or funds each paycheck. Your risk tolerance will determine your choice of funds.

Don’t set it and forget it: A common issue with 401(k) plans is that participants get a new corporate job and pick their funds and don’t review or make any changes. It is highly recommended to review the performance of your funds on a regular quarterly basis. For instance, you may pick a target-date fund when you first started your job and it will automatically adjust to being more conservative closer to your retirement. But talking to a financial planner you may decide that you are willing to take on more risk for a greater possible return. The same issue is just picking one asset class such as an S&P 500 index and not having other funds in your portfolio for greater diversification.

Maximize your contribution: You should review how much you can contribute to your 401(k) plan. You may be just contributing up to the company match when you can actually be contributing much more. The benefit of contributing more is that you save on income taxes and this gives you more tax-deferred growth and enables you to better fund your retirement goals.

A false sense of security: One of the greatest issues with 401(k) plans is that there is a false sense of security. All investments contain risks that should be matched with your risk tolerance. Also, there is a set it and forget it attitude as mentioned, especially with target-date funds. These funds seem simple, but do contain somewhat higher fees because of the rebalancing you don’t need to do yourself. For someone interested in learning more about investments, there may be lower fees by picking 2-5 individual funds and rebalancing them yourself on an annual basis. Not educating yourself on your 401(k), how it works, and your best investment choices may end up costing you in the long run.

Be sure to talk to a financial planner and see how your 401(k) plan fits into your overall retirement goals. Financial planners can help you maximize your 401(k), along with other financial assets, to help save for retirement.





*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.


At Chris Reddick Financial Planning, we Educate you about your personal finances, Inspire you to make meaningful change, and help you Achieve your short- and long-term financial goals. Learn more about the movement at

Learn More About My Services