How do I make 401(k) plan choices?
November 25, 2011
Q: For 401(k) plans, how do I go about choosing the right one for me?
A: Because 401(k) plans are offered through employers, the first step is to find out what your employer has available. Different plans offer different investment options, plus you'll want to familiarize yourself with other provisions of the plan, such as a company match. The company match is important--not all plans have one, but those that do will match some portion of your contribution to the plan. Taking full advantage of the company match is probably the easiest way to boost your retirement savings.
As for investment options, they can range anywhere from the equivalents of ordinary savings accounts to complex commodity or international investment vehicles. As a general rule, the closer you are to retirement, the more you should lean toward the savings-account end of the spectrum, but people's circumstances and risk tolerances differ. The best way to start selecting investment options is to make a fundamental choice between two types of vehicles:
- Asset allocation options These include multiple asset classes, with the option's investment manager allocating those asset classes according to a target retirement date or other general objective. These are good choices if you'd rather have a professional handle the crucial asset allocation decisions.
- Individual asset class options These allow you to individualize your asset allocation more precisely, but because of the difficulty of asset allocation decisions, taking this approach only makes sense if you feel you have a sufficient investment background to make those decisions.
During the investment boom of the 1990s, it became very popular for 401(k) plan participants to try to manage their own asset mixes. In the tough market that has followed, the need for professional asset allocation has been demonstrated--but this only helps if the people managing your plan's options have a good asset allocation track record.
Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.