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How do I Choose the Best 401k Options?

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  • Written By: Tiffany Manley
  • Edited By: A. Joseph
  • Last Modified Date: 21 January 2020
  • Copyright Protected:
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Choosing the best 401k options can be a daunting task for novice and experienced investors alike. Many company funds offer dozens of choices, which might require many hours of research to understand. Understanding the variety of funds available, what your risk tolerance is, how to diversify your portfolio and your company’s involvement in the plan are all ways to ensure that you are making the best decisions in regard to your 401k options.

Target-date funds are considered by many to be the easiest form of 401k investing. They allow a person to choose a fund that matures at a specified period of time. For instance, someone wishing to retire in 30 years would choose a target-date fund with a maturity date of 30 years from the time of inception. Target-date funds start more aggressively and concentrate more on stocks and less on bonds, and they become more conservative with a concentration on bonds rather than stocks as retirement draws closer.

Life-cycle funds operate in much the same way, but they are based more on risk tolerance than on a future retirement date. If you feel that you might be able to handle a very aggressive fund for 10 years but feel that you should become more conservative at some point, you would need to move out of the aggressive fund and into a more conservative one. Life-cycle funds still make investing relatively easy, but they allow some investor participation.

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Balanced funds and index funds are two more 401k options. A balanced fund generally offers less diversity but uses strong, long-standing performers to build wealth. Index funds usually cover a variety of stocks and might be grouped according to domestic, international and bond groupings.

Knowing how much of a risk you are willing to take is important in choosing the best 401k options. If you invest in items that might be extremely volatile but cannot stomach the idea of watching your balance dip down and rise back up repeatedly, aggressive options might not be right for you. The same can be said if you feel like you want to try to get the biggest return on your investment by taking a chance on certain funds. Realizing what you personally can handle will help make choosing the right options easier.

Many investment advisers recommend diversifying your portfolio. This means nothing more than making sure that your money is invested in different places. If the stock market nosedives but you still have a portion of money invested in bonds, you might be safe from losing all of the money that you have invested.

Being aware of how much your employer is willing to contribute or match also is important when choosing 401k options. This can help you make the wisest choices when it comes to investing. It also might help you maximize your retirement account.

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