How To Automate Your 401 Investments
If you dont want to spend a lot of time thinking about your 401 plan, many plans offer features and investment options that can help your savings grow without requiring extra effort on your part. These options can help you automate your 401 investment process:
It’s important to note that while auto features and investment options are designed to make our lives easier, they arent immune from needing occasional course correction. You should still regularly check your plan to ensure that your account growth is keeping up with your long-term goals.
Can You Lose Money In A 401
Its possible to lose money in a 401, depending on what youre invested in. The U.S. government does not protect the value of investments in market-based securities such as stocks and bonds. Investments in stock funds, for example, can fluctuate significantly depending on the overall market. But thats the trade-off for the potentially much higher returns available in stocks.
That said, if you invest in a stable value fund, the fund does not really fluctuate much, and your returns or yield are guaranteed by private insurance against loss. The tradeoff is that the returns to stable value funds are much lower, on average, that returns to stock and bond funds over long periods of time.
So its key to understand what youre invested in, and what the potential risks and rewards are.
Common Types Of 401k Fund Choices
Do you know what funds your 401k is invested in? You could be losing out on hundreds of thousands of dollars at retirement if it is poorly invested!
When you sign up for your 401k plan, theyll have a few different options that you can invest your money in. Its important to remember that a 401k is not an investment itself, it is an account that holds investments.You get to choose what the money in the account is invested in.
Choosing investments can be overwhelming at first! There are thousands of different funds out there to choose from. But the good thing is, your company has already significantly narrowed the choices for you .
Lets talk about the most common types of funds, and how to choose the best ones from the options available to you.
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Invest Based On The Time Until You’ll Need The Money
Remember that a 401 is a retirement account, so you should plan not to withdraw money until you are at least 59 1/2. If you’re fairly young now, that means you have a long investing horizon ahead of you. If you’re nearing retirement age, however, your investing horizon is much shorter you will need to start withdrawing that money soon to fund your retirement.
Keep this timeline in mind when determining your risk tolerance. If you’re investing in your 401 throughout your career, your willingness to take risks should change over time. When you’re younger, more of your 401 funds should be invested in the stock market to maximize potential returns. You have time to wait out any downturns. However, as you age, you have less flexibility around market volatility and should shift your funds toward safer investments.
Lower-risk investments such as cash, CDs, money market funds, and bonds present far less risk of loss but also lower rates of return. If you overinvest your 401 funds in safe investments like these, you risk missing out on the wealth-building returns of the stock market.
To make sure you aren’t taking on too much — or too little — risk with your 401, consider this simple formula: Subtract your age from 110 and invest the resulting percentage of your 401 money in the market. A 20-year-old would have 90% of their money in stocks while an 80-year-old would have just 30% of their assets in the market.
Use Target Date Funds To Retire On Your Terms
Target date funds are geared toward people who plan to retire at a certain timethe term “target date” means your targeted retirement year. These funds help you maintain diversification in your portfolio by spreading your 401 money across multiple asset classes, including large-company stocks, small-company stocks, emerging-markets stocks, real estate stocks, and bonds.
Youll know your 401 provider offers a target-date fund if you see a calendar year in the name of the fund, such as T. Rowe Price’s Retirement 2030 Fund.
Target date funds make long-term investing easy. Decide the approximate year you expect to retire, then pick the fund with the date closest to your target retirement date. For example, if you plan to retire at about age 60, and that will be around the year 2030, pick a target-date fund with the year “2030” in its name. Once you pick your target-date fund, it runs on auto-pilot, so there is nothing else you need to do but keep contributing to your 401.
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Worst Funds For 401 Plans
Sometimes the best choice is to avoid the worst choices. As a fiduciary, employers are wise to avoid placing funds in a 401 plan that can have big declines in price during a short period. Also, if you are the employee, and your 401 plan includes some of these options, proceed with caution, and make sure you fully review the option before choosing it as part of your investment plan.
Picking Your 401 Investments
A 401 plan typically offers at least 10 or 12 investment funds, though some plans may offer a few dozen choices, including target-date funds. How do you choose among these options?
For many, the limited selection of funds in a 401 may be more of a benefit than a drawback, helping to simplify the process. For experienced investors, a limited fund choice is, well, limiting. These investors might prefer the unlimited selection available in an IRA. But most 401 participants want a good solution rather than a perfect solution .
There are two broad factors that 401 participants should look at:
- Long-term returns: These are the returns on the fund over five- and 10-year periods, as well as since inception.
- Expense ratio: Basically, this is the cost to hold the fund for a year as a percent of the money invested in the fund.
Participants should search for the best returns at the lowest costs, all else equal. Youll have to make a trade-off between the performance and the funds expenses sometimes, too. But it may be worth paying a higher fee for the prospect of much better long-term returns.
Youll want to be careful about buying any fund thats had a good recent performance, such as one- or two-year returns, but has delivered a mediocre performance over longer periods. Many investors make the mistake of chasing a hot fund, only to see its performance drop in the future.
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Should You Follow The Herd
Just because everybody is doing it doesnt necessarily mean its right for you. As financial advisors are quick to point out, financial situations differ by individual. Are you the right person to snub target-date funds and instead put together your own mix of stocks and bonds?
If your retirement funds are inside a 401, you wont have a lot of choices in most cases, so putting together your own actual mix of stocks and bonds might not be possible. However, you could pick other assets outside of target-date funds.
Use Model Portfolios To Allocate Your 401 Like The Pros
Many 401 providers offer model portfolios that are based on a mathematically constructed asset allocation approach. The portfolios have names with terms like conservative, moderate, or aggressive growth in them. These portfolios are crafted by skilled investment advisors so that each model portfolio has the right mix of assets for its stated level of risk.
Risk is measured by the amount the portfolio might drop in a single year during an economic downturn.
Most self-directed investors who aren’t using one of the above two best 401 allocation approaches or working with a financial advisor will be better served by putting their 401 money in a model portfolio than trying to pick from available 401 investments on a hunch. Allocating your 401 money in a model portfolio tends to result in a more balanced portfolio and a more disciplined approach than most people can accomplish on their own.
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What Are The Best Retirement Plans For You
If you have a 401 or other workplace retirement plan: First you may want to contribute enough to get any free money offered by your employer via the company match. For more on the pros and cons of these plans, jump to our section on employer-sponsored retirement plans, including 401s, 403s, 457s, defined benefit plans and TSPs.
If youve maxed out your 401 or you dont have a retirement plan at work: Consider an IRA. Jump to our section on the pros and cons of four types of IRAs, including traditional and Roth IRAs. If you already know you want an IRA, check out our round-up of the best IRA providers.
If youre self-employed or the owner of a small business: Jump to our section about retirement accounts designed specifically for you, including the , Solo 401, SIMPLE IRA and profit sharing.
We’ll walk you through the various types of retirement plans below. Bear in mind, these are the retirement plans or accounts available to you depending on your situation. For more information on which investments to choose inside your retirement account, connect to our guide on retirement investments here.
How To Make Your 401 Selections
8 Minute Read | September 27, 2021
If you value your companys 401 benefit, the day you receive your enrollment package is an exciting one. Soon youll be building your retirement nest egg with the help of your employers 401 match and the right investment selectionsyou cant wait to get started!
So you rip open your envelope and glance over the contents: forms, a nice-looking brochure, and maybe a letter from your employer welcoming you to the companys 401. Once youve read the letter, however, the rest of the materials simply dont make a lot of sense. Theres information about vesting, beneficiaries, equities, risk assessments, and 401 selectionsbut nothings clicking.
The only thing that seems clear is that investing in a 401 is important business. Your ability to retire depends on you getting it right. But how can you make such major, long-term decisions when you dont even understand what the choices are?
Understanding your workplace 401 is the first step toward the retirement of your dreams, so let’s get started.
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Know Yourself And Your Time Horizon
Just like most things in life, theres no one-size-fits-all investment plan. Some investors panic if their investment values go down 5%, while others can handle a 25% annual drop and remain cool. Before June tackles the task of choosing a fund, she needs to do a gut check. There are many risk quizzes online, and her 401 provider might even offer one. A risk quiz questionnaire helps you figure out how much volatility you can tolerate in your investments.
The results of Junes risk quiz suggest that shes a moderately aggressive investor. June expects to retire in approximately 40 years at age 67. With many years until she withdraws her retirement funds, June is confident that she wont bail from her investments even if they drop in value 15% to 20% one year.
This risk profile will inform her asset allocation or the percent of stock funds vs bond funds and fixed investments. The outcome of the Junes quiz suggests that an 80% stock and 20% bond allocation is reasonable for now.
A Key To Smart Retirement Saving: Spreading Your Portfolio Across A Few Of The Best Mutual Funds In Your 401 Plan Here Are The 30 Top Options Available As We Enter 2022
But it doesn’t have to be.
Every year, with the help of financial data firm BrightScope, a financial data firm that rates workplace retirement savings plans, we analyze the 100 mutual funds with the most assets in 401 and other defined-contribution plans, and rate them Buy, Hold or Sell. Our goal: to guide you toward the best mutual funds likely to be available in your workplace plan.
In the end, a cool 30 funds, which we’ll describe in detail below, won our seal of approval. But you’ll want to pay attention to the fine print. Some funds are appropriate for aggressive investors others are geared for moderate savers.
We’ll also point out that we didn’t weigh in on index funds. That’s because choosing a good index fund always rests on three simple questions: 1.) Which index do you want to emulate? 2.) How well has the fund done in matching that index? 3.) How much does the fund charge? Generally speaking, however, we have no issues with any of the index funds listed in the top 100.
Assessing actively managed mutual funds is a different beast. We look at each fund’s long-term returns and year-by-year performance, as well as its volatility and how it fares in difficult markets. We also consider manager tenure, fees and other factors.
1 of 30
- Rank among the top 401 funds: #97
- Best for: Value-oriented stock exposure
Consider yourself lucky.
The fund currently yields 1.6%.
DODIX yields 1.4%.
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The Statistics Are Clear
Statistics show the popularity of these funds. As of 2020, more than 50% of 401 investors have all of their 401 assets in target-date funds. More than 75% of investors have a portion of their money in at least one target-date fund, according to a study from Vanguard, which is a leading index-fund provider.
Part of the reason for the explosion is because the funds are often the default investment choice for 401s. If you meet with your human resources representative or maybe a plan advisor, theyre likely to steer you toward a target-date fund because it allows for a hands-off approach to retirement planning.
Who Actually Benefits From Target-Date Funds?
Target Date Funds Make Retirement Planning Easy
Everyone can invest their retirement savings in a target date fund. Its just a matter of where you choose to do your investing.
If you have a workplace retirement plan, such as a 401 or 403, theres most likely to be only one target date fund series from an investment managersay, Vanguard, Fidelity, or BlackRock. Your choice is limited to picking the target date fund whose target year jibes with around when you expect to retire.
If you have an individual retirement account at a discount brokerage, you may have the option to choose between the brokerages own target date fund as well as target date funds from other firms as well, though there may be an extra fees involved for the latter options.
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Be Aware Of The Fees Associated With Your Plan
The goal of investing in a 401 plan is to grow your money over time through investments. Because its an active investment , there are fees included. Your plan negotiates these fees on your behalf. They can include amounts needed to cover administrative costs and management expenses. While you dont have complete control over the fees in your 401 plan, its important to be aware of what youre paying. If youre choosing your own investments, look at fees and returns to ensure that you get what you pay for.
Take Your 401 With You
Most people will change jobs more than half-a-dozen times over the course of a lifetime. Some of them may cash out of their 401 plans every time they move, which can be a costly strategy. If you cash out every time, you will have nothing left when you need itespecially given that you’ll pay taxes on the funds, plus a 10% early withdrawal penalty if you’re under 59½. Even if your balance is too low to keep in the plan, you can roll that money over to an IRA and let it keep growing.
If you’re moving to a new job, you may also be able to roll over the money from your old 401 to your new employer’s plan if the company permits this. Whichever choice you make, be sure to make a direct transfer from your 401 to the IRA or to the new company’s 401 to avoid risking tax penalties.
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Using Stock Rover To Choose Mutual Funds For Your 401k
Like many companies, Stock Rover offers a 401K plan, which allows me to redirect some of my salary into savings for retirement. When I enrolled, I was given a single sheet of paper with a list of funds I could choose from. It looked like this:
Despite being financially literate, I was a bit lost. Which ones should I choose? How much should I put in each one? Luckily, to help me answer that question, I have this handy-dandy tool at my disposal that can help me figure out which of these 16 funds has the best performance and lowest overhead. Yup, you guessed it: its called Stock Rover.
While Stock Rover is a research tool primarily for stocks and ETFs, we also support mutual funds. So to compare these funds, see historical performance, and see the expense ratio, Stock Rover fits the bill.
Before I compare them in Stock Rover, Im going to define the different types of funds .
A Few Words About Mutual Funds Or Pooled Investment Options
We all hear about people making it big on individual stocks. But its also easy to lose money on any single investment. It may be intimidating to think about researching and picking stocks or investments with the pressure of potentially losing money.
Mutual funds and other commingled investments include a variety of investment types. That helps reduce risk.
Investment professionals with special training and tools manage mutual funds. That means you dont have to worry about the everyday decisions involved in picking individual investments within a mutual fund. And in some types of funds, the managers even adjust the mix of investments over time to help you stay on track to reach your goals.
In general, its good to have less risk as you get closer to your end goal, whether thats retirement or another date.
Thats because if the market drops, you have less time to recover from losses. Giving up some potential for growth might be worth it in exchange for lower risk.
Its also a good idea to rebalance your portfolio at least annually. Over time, some investments may grow more than others. After a while, your mix of investments isnt the same as when you started. That could mean youre taking on more risk than you originally intended.
Rebalancing takes everything back to your original mix, but if the change is more in-line with where you want to be, thats OK, too. Most financial institutions can help you with rebalancing. Some do it automatically for you.
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