Your 401(k) offers a range of investment options. The mix of options depends on the choices made by your plan provider. When you are ready to create a 401(k) portfolio that can sustain your long-term financial needs, you must learn more about various kinds of investments.
After you decide to participate in your company’s 401(k) plan, one of the most important and challenging decisions that you have to make is where to put the money that you are regularly taking from your paycheck and contributing into the plan. The choices you make will determine the growth potential of your investment portfolio and how much money you will have when you retire.
401(k) Basics and Investment Options
The sponsor of your 401(k) plan is the plan fiduciary. This is typically your employer. The sponsor has the legal responsibility of choosing the options available for the plan and making sure that they continue to be appropriate options.
Generally, a 401(k) can provide anywhere from three to dozens of investment choices. A typical plan may offer eight to 12 options. These might be strictly mutual funds or a combination of mutual funds, stable value funds, annuities, company stock, guaranteed investment contracts, and more. Some 401(k) plans also offer brokerage accounts. Instead of just limiting your choices to what your 401(k) offers, a brokerage account makes available the full spectrum of stocks, mutual funds, bonds, and other kinds of assets that you can invest in.
Your 401(k) plan allows you to choose how to invest your contributions. If your plan also comes with a contribution match from your employer, it might also let you choose how to invest the matching contributions from your employer, although some plans might only allow the employer to choose. For example, some employers might only match your contribution with company stock.
If your plan offers limited choices, like a couple of mutual funds, a value fund, a bond fund, and a money market fund, each fund will give you a different kind of performance. It is up to you to learn about these differences and how they will affect your portfolio.
When your employer automatically enrolls you in the company 401(k), they might put your contributions into a default investment choice that the federal government has deemed acceptable, which is often a balanced fund, a lifecycle fund, or a managed account. You have the freedom of keeping the default or moving your money into another investment option available from your plan.