I remember when I started my first job real job after college, being overwhelmed by the thought of planning for retirement. The idea of retiring was such an abstract concept. How is a young twenty-something-year-old supposed to prepare for a life that was forty years away?

What I later learned was that I wasn’t alone in how I felt about retirement planning.


Most of us can’t plan what we’re going to do this weekend, let alone planning for something that’s 30 plus years in the future. So it’s completely understandable to put off saving for retirement.


If you’ve ever looked at your 401(k) or another employer-sponsored retirement plan and felt overwhelmed at the myriad of options, here’s a brief guide to five of the most common investment options found in 401(k)s.


Mutual funds

A type of security that is essentially a pool of money from many people given to a fund manager to invest. Investing in a mutual fund gives you more buying power because the manager takes the funds from many people and uses it to buy underlying securities (i.e., stocks, bonds, etc.). There are almost 10,000 mutual funds to choose from, and not knowing the basics can make it very challenging to make decisions.


Which mutual fund is best for me?

There are many different types of mutual funds, and the one you choose will depend on several factors, including your risk tolerance, your objectives, your asset allocation, and the other investments you have outside of the retirement account.


Your choice of a particular mutual fund will depend on the kind of investor you are and your goals. For example, an aggressive investor would probably have a portfolio made up of mostly growth funds. A growth fund is a mutual fund that emphasizes investing in the stocks of companies that have the potential for above-average gains. Whereas a moderate investor or a retiree will have a portfolio made up of mostly bond mutual funds. This fund invests in bonds, and it provides regular income from the bond’s interest.


Actionable Tips

Are you ready to change your life? Become an insider and be the first to know about what's happening in the world of finance.


Stable value funds

A stable value fund is a fund that invests in short-term and intermediate fixed-income securities. Stable value funds are in half of all 401(k)s. The main goal of a stable value fund is to maintain the value of the investments and keep them, you guessed it, stable. These fund types are often used in place of money market funds as an alternative to cash, but note that they are not a cash investment.

When do you use stable value funds?

A stable value fund can be used as an alternative to money market funds in your 401(k) if you’re willing to accept a slightly higher level of risk.

Index funds

Another type of fund in 401(k)s is what is known as index funds. Index funds are passively managed and mimic the performance of a benchmark/index (like the S&P 500). Most index funds invest in all of the securities in the benchmark they’re copying. For example, an index fund that matches the S&P 500 will add and remove underlying stocks only if its benchmark, the S&P 500, removes or adds a stock.

Is it right for me?

Use index funds if you want a broadly diversified portfolio. They’re often lower risk than other types of investments. The average fees for index funds are also lower than non-index funds. They’re a good fit for you if you’re looking for a convenient but diversified investment option.

Target date funds

Target-date funds are funds that used to save for retirement at a specific date. The portfolio invests in stocks, bonds, and cash all in one fund. The allocation moves from an aggressive strategy to a more conservative approach as the target date gets close.

Are target-date funds a good option for me?

While target-date funds can make planning for retirement a bit easier because you’re just choosing one fund, it’s essential to choose the right one. First, make sure the asset allocation of the fund you’re in or are considering matches your risk tolerance. If you’re in a fund that has 80%/20% stocks and bonds mix, but your risk tolerance is that of a conservative investor, then that target-date fund is not for you. Second, review the underlying securities (read stocks, bonds) of each fund to avoid being heavily concentrated in one stock.

Company stock

Some employers offer employees the opportunity to invest in the company stock.  One way to invest in your company stock is if your employer matches your 401(k) contributions with company stock instead of cash. Employers offer the company stock to employees as a way for employees to have skin in the game. The theory is that you’ll work much harder to help that company succeed if your wealth is tied to the company.

Should I have company stock in my 401(k)?

The answer to whether or not you should have company stock in your 401(k) depends on several factors. First, how stable is the company? How old is the company? Have you taken the time to read the company’s annual report? Have you listened to the most recent earnings call for your company? What are analysts saying about your company? Second, is there an overlap between the company stock and any outside investments? If you work in healthcare and 40% of your 401(k) is in the company’s stock, and you have an IRA that also invested in a healthcare ETF, you would be overly concentrated in the healthcare sector.

Ideally, you should have no more than 10% of your retirement account (your 401(k) account) in your company’s stock. I can’t tell you the number of times that I witnessed people lose a sizeable chunk of their retirement account because they were so heavily invested in an employer’s stock after the company went out of business.

Your (1) to-do: Review your 401(k) or another type of employer-sponsored retirement account. Review your plan and look for the investment types listed above. Choose one (even if there’s more than one investment type) and review the information provided about that particular investment type. If you own the investment, check the percentage of the investment option and make sure the amount you own is in line with your risk tolerance.








Book today!

You Need a Financial Plan

Book your complimentary discovery call today.

Let's Talk

Want more actionable tips and guidance? Join us in our private community! Click Here!