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Choosing Between 401k Investment Options

Whenever I join a new company, how I invest my 401k contributions is always an important decision I'd like to set and forget. I have three methods for how I choose between the different investment options in the company's 401k.


First off, full disclosure, I'm lazy. I don't want to have to pay attention to how my 401k is doing. My retirement is years away and I don't want to have to think about it. I'd like for it to be on autopilot. So, here are the three things I do in order of preference.


I always look for the Target Date Funds that may be offered. Those funds are usually titled something like "2035 Target Date Fund" or "Target Retirement 2050 Fund" where the number is the approximate year you aim to retire.


Such funds are already doing all the right things, have low fees or expense ratios, are diversified, risk balance, regularly rebalance, etc. If there is more than one for a particular retirement target year, I break the tie with the expense ratio or fee. It's the only thing I see that's actively eating into my final retirement balance.


I know myself to be more risk tolerant than your average person, so I tend to aim for the target date fund that is at least 5-10 years further out than my actual planned retirement date. This way, the risk exposure continues to be high for longer, which is what I want. I will provide my own financial stability outside of the 401k until the target date, so that's why I do this.


If a target date fund is unavailable, I look for their little calculator almost all brokerages have nowadays which helps you determine your asset allocation based on your risk tolerance. Whatever it spits out, I go with... and maybe even going slightly riskier than whatever they recommend. It usually looks like a pie chart, with asset classes in each slice based on how you responded to the questions. They often have recommended funds and combos which will match that asset allocation pie chart, so you can take what they auto-generate or tweak as you like. I sometimes like to tweak to find the funds in each asset class that have the lowest expense ratios. Again, it's the one thing I can control.


If that is unavailable, my first thought would be, what a crappy choice by HR. Then I go find an asset allocation calculator from SOMEWHERE else. I like Smart Asset and Vanguard if you need a place to start. Just Google "asset allocation calculator." Then I manually match up the 401k offerings with the asset class they belong to so I can try to make my own asset allocation pie chart in my 401k holdings. Then one is supposed to rebalance quarterly... and did I mention I'm lazy? So I'll do it when I remember to. And only to check the asset allocation and make sure it's still how I intended it. If not, I just change the auto-investment ratio to weight the lagging fund more heavily to "catch up" to the right balance. For example, the riskier investments might've grown to a larger percentage of the pie... to bring it back down, I'll increase my percentage investment going to something more conservative for all my new paychecks... until the next time I take a look at things. I also do nothing if none of the ratios are more than 5-10% off from the original. It doesn't have to be perfect. If I'm honest, I'm rebalancing less than once a year. This is the WORST possible thing I might have to do. Usually companies make this easier by having the two options above so you can get going right away and not have to pay any attention.


Worst case scenario, blindly click to set it and forget it. Investing at all is better than not investing anything. Do not leave it as cash. This is an employer benefit that you should absolutely take advantage of for your financial future. When you look at it again, I hope it pleasantly surprises you.

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