September 1, 2020
By Rahul Iyer
Each 401K has different fund types, but the selections aren’t as large as you’d think. Employers have a select few to choose from, and employees have the fiduciary responsibility to choose the funds that are right for their retirement goals.
Employers must offer at least three different funds for a 401K. At the very least, employers must offer a stock, bond, and cash option. Many employers offer much more than the basics, though.
Employers have a fiduciary responsibility to choose funds that are in the best interest of their employees. Employers choose a plan provider (a company that runs the 401K plan) and then chooses funds from that provider.
Some of the most common funds offered are below.
The most popular fund is the S&P 500 Index Fund. Made up mostly of large-cap stocks, this fund is made up of stocks from the 500 largest companies in the US. Most investments try to mimic the S&P 500 returns, so this is a stable fund for most people to choose.
The Small Cap Fund is good for aggressive investors. Because they are ‘smaller’ companies, there’s more volatility but also potentially higher returns. Small-cap funds often perform better than large-cap funds in the long-term, so if you’re in it for the long haul, it’s a good option to consider.
This fund covers the entire bond market. It provides a more conservative investment to your 401K and is a great level of diversification from higher-risk investments, such as stocks. If you invest in the Total Bond Market Index, you don’t have to invest in any other bonds since this covers the whole gamut.
It’s a good idea to keep a portion of your account liquid. This provides some semblance of security since there’s no risk of loss. Money market funds are a great way to hold the cash since they offer high-interest rates and virtually no risk.
Many retirement accounts include a Target Date Fund. It targets your retirement date and invests your money according to your timeline. It’s a way to set-it-and-forget-it. Most companies have a large variety of target-date funds to accommodate people of all ages.
Ultimately, the decision of what to invest in is yours. The plan sponsor can show you the available accounts and have a default account if you don’t choose your investments, but it’s to your benefit to figure it out. Think of your risk tolerance and timeline. Are you looking for aggressive or conservative investments? Do you want something in between – something diversified?
Talk with your financial advisor to see what the best allocation is given your circumstances including any money you have put aside for retirement already. Through the years, keep an eye on your account and reallocate it as necessary to ensure that you meet your retirement goals.