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How Does My 401(k) Get Invested?

401(k) savings

A 401(k) is a tax-deferred, employer-sponsored retirement savings plan that allows you to save and invest a portion of your paycheck. Your employer may contribute matching funds to your 401(k) account. The company may offer a choice of investment options, but you control how your 401(k) money is invested.

What Are the Common 401(k) Investment Options?

Employees can typically choose from a spread of mutual funds in which to invest. Options may include stocks, bonds, and money market investments. A popular choice for 401(k) investors is target-date funds – a combination of stocks and bonds that gradually becomes more conservative as you get closer to retirement age. Investment choices can range from aggressive growth funds to conservative income funds. Mutual funds option may include:

  • Index funds: Exchange-traded funds with portfolios designed to track or match components of a financial market index.
  • Large cap funds: Funds that invest a larger part of their corpus in large market capitalization companies, considered to be trustworthy, reputable, and strong.
  • Small cap funds: Comprising equity securities of smaller companies, small cap stocks provide diversification but are more volatile than large cap stocks.
  • Foreign funds: Investing in companies outside the U.S.
  • Bond funds: Investing primarily in government, municipal, corporate, or convertible bonds, or other debt instruments, such as mortgage-backed securities, with the goal of generating monthly income for investors.
  • Real estate funds: Mutual funds that invest in securities offered by public real estate companies, including real estate investment trusts (REITs), which pay out regular dividends.

How Should I Invest My 401(k) Funds?

It is up to you how your 401(k) money is invested. You may choose among any of the options your plan offers. It is crucial to choose wisely, as you are bearing all the risk. Feel free to consult with our knowledgeable agent regarding your 401(k).

As a general guideline, stocks are a good choice when you are investing for retirement, as they tend to generate returns that outpace inflation. Adding bonds or cash can help reduce the volatility of your portfolio. To maximize your 401(k) investments, you will need to understand the different options and know how to manage your account going forward.

Most investment options offered by 401(k) plans are mutual funds, which can range from conservative to aggressive. Conservative funds avoid risk by sticking with high-quality bonds and safe investments. Aggressive growth funds can swing widely between large gains and large losses over time. Funds may be described as balanced (moderate level of risk) or value (middle of the risk range with modest growth).

Considerations that factor into your investment strategy should include your risk tolerance and your age. The younger you are, the more of your 401(k) money can be invested in riskier stock funds. These types of funds can bring you greater returns, but if it all goes wrong, a younger person has more time in which to recoup losses. As you move closer to retirement age, it is wise to gradually reduce your holdings in riskier funds and move to safe havens – investments expected to retain their value or increase in value during times of market turbulence.