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How To Narrow Down Your 401(k) Investment Choices

If you’re looking at the investment options available in your 401(k) and are overwhelmed by your range of choices, you should count yourself lucky. Many 401(k) plans offer only very limited investment options, and some encourage participants to invest heavily in your own company’s stock. 

You might not feel lucky, of course, as you scroll down the endless list of funds available to you. Luckily, there are a few ways that you can narrow down the options. Primarily, this process involves carefully considering your risk tolerance, age, and how to minimize the fees you pay. After taking out investments that aren’t suitable for your portfolio, you should be left with a manageable list.

Key Takeaways

  • The range of options available in the average 401(k) plan can be daunting, but there are some ways of narrowing down your options. 
  • You should first decide on the level of risk you are comfortable with. 
  • This will depend on your age, because older investors should be more conservative with their choices. 
  • Next, eliminate any funds which charge high fees. 
  • Finally, make sure your portfolio is well-diversified, and resist the temptation to over-manage it.

How To Choose Investments For Your 401(k)

First, some basics. When you look at the investments in your 401(k), you are likely to see mostly mutual funds, which are the most common investment options offered in 401(k) plans, though some are starting to offer exchange-traded funds (ETFs). Both mutual funds and ETFs contain a basket of securities such as equities

All of these funds can be put on a spectrum from low-risk, low-reward funds to high-risk, high-reward. The terms used by mutual fund managers are a little different, though. The most common is to see funds described as a range from conservative to aggressive, with plenty of grades in between. Funds may also be described as balanced, value, or moderate. All of the major financial firms use similar wording.

You don’t have to pick just one fund. Instead, you could spread your money over several funds. How you divvy up your money—or your asset allocation—is your decision, and can get complicated. There are plenty of gurus out there who will claim that their formula for allocation is the best, but in reality building a solid, well-performing portfolio comes down to four things: risk, your age, fees, and diversification. 

Risk Tolerance

When choosing investments for your 401(k), the first and most important decision you’ll have to make is how much risk you are comfortable with. This consideration is a highly personal one, and is known as your risk tolerance. Only you are qualified to say whether you like the idea of taking a flier, or whether you prefer to play it safe. 

Essentially, you want to choose the riskiest investments that you are comfortable with, because these will offer the best opportunities for growth. If you don’t want to take a big risk with your retirement savings – an understandable feeling – ignore any funds that are described as “aggressive,” “growth,” or “specialized.”


Your next consideration should be your age, which will also have an impact on your risk tolerance. Specifically, how many years you are away from retirement can have an impact on your risk tolerance. This is because it’s often argued that a younger person can invest a greater percentage in riskier stock funds. At best, the funds could pay off big. At worst, there is time to recoup losses since retirement is not imminent. 

Then, as you get nearer to retirement, you should gradually reduce holdings in risky funds and move to safe havens. In the ideal scenario, you’ve stashed those big early gains in a safe place while still adding money for the future. This is the basis for target-date funds, which can be a good way to automate your asset allocation.

There are a number of formulae that are used to calculate how much risk a person should have at various stages of their life. However, the traditional guidance is that the percentage of your money invested in stocks should equal 100 minus your age. More recently, that figure has been revised to 110 or even 120 because the average life expectancy has increased. Using a basis of 120, a 30-year-old would invest 90% of their portfolio in equities, while a 70-year-old would invest 50%.

This advice can further narrow your investment options. If you are young, the standard approach would be to ignore the more conservative investments offered through your 401(k), and vice versa.

Target-date funds can be a good set-it-and-forget-it option for retirement accounts. These funds offer diversified portfolios that automatically become more conservative over time as retirement approaches.


The two factors we’ve considered so far relate to risk, which is an inherently personal consideration. The expense ratio of an investment, in contrast, are an objective measure of how expensive it is to hold.

The business of running your 401(k) generates two sets of bills—plan expenses, which you cannot avoid, and fund fees, which hinge on the investments you choose. When choosing investments for your 401(k), you should avoid funds that charge high management fees and sales charges. Actively managed funds are those that hire analysts to conduct securities research. This research is expensive, and it drives up management fees.

Index funds generally have the lowest fees because they require little or no hands-on management. These funds are automatically invested in shares of the companies that make up a stock index, like the S&P 500 or the Russell 2000, and change only when those indexes change. If you opt for well-run index funds, you should look to pay no more than 0.25% in annual fees.

In other words, once you’ve decided on your risk tolerance, and eliminated high-risk or low-return funds from consideration, next eliminate the funds that charge high fees.

High fees can make a huge difference to your eventual returns. According to research by the US Department of Labor, investors can lose tens of thousands of dollars over a lifetime if they pay fees of 1.5% rather than 0.5%.


At this point, you’ve hopefully narrowed down the number of suitable 401(k) investments to a much more manageable number. The next step, somewhat counter-intuitively, is to choose a variety of the investments that are left.

You probably already know that spreading your 401(k) account balance across a variety of investment types makes good sense. Diversification helps you capture returns from a mix of investments—stocks, bonds, commodities, and others—while protecting your balance against the risk of a downturn in any one asset class.

Once you’ve decided on a risk level you can handle, made sure you’re not going to pay high fees, and spread your money across a number of asset classes, the trick is to wait. You should fight the temptation to try to time the market, trade too often, or try to outsmart the market. Review your portfolio periodically, perhaps annually, but try not to micromanage: the best ally you have in building up a good retirement portfolio is patience.

What Is the Safest 401(k) Investment?

The least-risky investment in a 401(k) would be either money market funds or U.S. government bonds (known as Treasuries). However, these investments will typically offer a very low rate of return and may not keep up with inflation.

Can You Lose Money in a 401(k)?

Yes. Because your 401(k) will be invested in various assets (e.g., stocks, bonds, etc.), your portfolio will be exposed to market risk. If the stock market crashes, the stocks component of your portfolio will also go down in value. This is why you should move your money into safer investments as you approach retirement.

What Can I Add To My 401(k)?

The Bottom Line

The range of options available in the average 401(k) plan can be daunting, but there are some ways of narrowing down your options. You should first decide on the level of risk you are comfortable with. This will depend on your age, because older investors should be more conservative with their choices. Next, eliminate any funds which charge high fees. Finally, make sure your portfolio is well-diversified, and resist the temptation to over-manage it.

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