How to Find the Best 401(k) Investments

Many folks are likely wondering how to find the best 401(k) investments after signing up for their company's retirement plan. Here's where to get started.

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Have you ever wondered how to find the best 401(k) investments? If you work for a company, most likely you have access to a 401(k) retirement plan. But for many people, this corporate benefit did not come with much explanation – you were either handed a thick folder or received an email with instructions on how to join the company's 401(k), along with the name and email of a contact in HR for any questions.

The result of folks not knowing how to find the best 401(k) investments is that they are not maximizing the benefits of their retirement plan. That's unfortunate because 401(k)s are an easy way to accumulate wealth and is a source of free funds; most employers match their workers' contributions up to typically 6% of their pay. 

It is also a way for many people to build wealth painlessly by contributing a monthly amount that is taken out of their paycheck and invested in available funds in the 401(k) plan.

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For those who aren't familiar with what a 401(k) is, it is simply a retirement plan in which a set amount designated by the employee is taken out of their salary before taxes. This monthly amount is invested in several funds inside the company's 401(k) plan, which the employee gets to choose. 

Vanguard and Fidelity are two popular mutual fund companies that administer and offer funds in 401(k) plans. These mutual funds can be stocks, bonds, money market securities or other investments.

A note about employer matching funds: Often you have to stay an employee for five to six years for the funds to be fully vested, meaning that's when all of the company's matching money actually becomes yours.

Contribute enough to your 401(k) to at least match the employer contribution. If your company matches 50% of your contribution up to 6% of your salary, then aim to invest at least 6% of your pay. A good rule of thumb is to invest at least 10% to 15% of your pay – it could even be higher if you're investing late in life. Strive to increase your contributions every year. Some 401(k) plans will even automatically increase it for you.

If you choose a traditional 401(k) vs a Roth 401(k), you don't pay taxes on the funds or its earnings until you withdraw it. If you do so before turning 59½, you will have to pay a 10% penalty in addition to the applicable taxes. You are required to withdraw a minimum amount after 72 years of age.

How to find the best 401(k) investments for your retirement plan

Age and risk tolerance: If you are not retiring in a few years, consider being more aggressive in your investments because you theoretically will have more years to recoup your money if the accounts go south. This means allocating a larger portion of your money into stocks. Being more aggressive also means the potential to earn is even greater. Otherwise, aim for an allocation of stocks and bonds. It won't be as volatile, but the return potential is also typically less.

Simplify: Many 401(k) plans offer target date funds. These funds are structured based on your retirement year. For example, a target date fund for 2050 means it is structured for folks retiring that year. How far you are from 2050 will determine your mix of stocks and bonds in that fund, which rebalances over time as you get closer to retirement.

If you want to pick your own funds, make sure to diversify. While mutual funds by nature are technically diversified since they have to hold many securities, these investments might all be in the same country, sector or region. For example, there are tech mutual funds that hold dozens of individual company stocks but it is all in one sector. Thus an event that affects the sector impacts all the companies in it.

Also ensure that you don't invest only in funds that buy large company stocks, or large-cap funds. (Large-cap stands for large capitalization, referring to companies that have a market capitalization above $10 billion.) Make sure to have some exposure to mid-cap and small-cap funds as well. And see to it that you have a good balance of growth (fast-growing companies) and value (companies whose stocks are selling at a discount). Warren Buffett is a well-known value investor.

How to research mutual funds

There are two general investing styles in mutual funds: passive and active. Passive funds are those that invest in an index such as the S&P 500. These are considered passive because they simply buy and hold all the securities in an index for a long time with minimal turnover. Actively managed funds are run by portfolio managers who select certain securities in hopes of beating the market. However, research has shown that passively invested funds have consistently outperformed actively managed funds.

When you are a researching fund, look at its fees, performance over three, five or 10 years, and tenure of its managers if it's an actively managed fund.

Here are some websites for you to researching the best 401(k) investments:

Your 401(k) administrator's website (Vanguard, Fidelity or others) will typically offer research and educational tools for plan members to access. For example, Fidelity has an extensive stocks and funds research site to screen for mutual funds.

Morningstar: A respected name in personal finance, the site offers detailed fund profiles, performance history, and ratings. There is free, basic access and a subscription plan for more detailed information.

Yahoo Finance: It offers real-time quotes, historical stock data, analyst ratings and news. Most data is free.

Zacks Investment Research: It offers mutual fund rankings based on its proprietary scoring system plus detailed analysis. Some information is free and others are behind a paywall.

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Deborah Yao
Contributing Writer,

Deborah Yao is an award-winning journalist, editor, and personal finance columnist who has held editorial roles at Kiplinger, The Wharton School, Amazon, The Associated Press, S&P Global (SNL Kagan) and MarketWatch. She specializes in writing and editing articles on finance and technology, with particular expertise in the areas of stock analysis, monetary policy, fintech, blockchain, macroeconomics, financial planning, taxes, among others. She has been published in The New York Times, USA Today, CBS News, ABC News, Wharton Magazine, and many other news outlets.