401(K): Selecting Funds

Selecting Funds Within Your 401(k) Plan:

Now you’ve got an account type figured out and picked a percentage of money that will flow into the account each pay period. So, where does that money go? Here we will go through the funds available in your 401(k) plan. Each employer selects various types of professionally managed mutual funds so this menu will vary from employer to employer. You aren’t able to select individual stocks or bonds, but rather you can choose from a limited number of mutual funds – or funds that will spread your money across many different individual investments. The chart below will try to give a generic description to match the fund that is likely available to you, describe what it is, and provide comments as to what general allocations to these funds would be ideal to an investor with a very long time horizon to retirement (20-30+ years). Remember your fund names and types will likely sound different but they should resemble the fund description provided below.

At the highest level – remember this money is strictly for investing for our retirement. This point is at least 30, maybe upwards of 40 years away for many of us. Since our timelines for this money is extremely long, it is best that 100% of this money is allocated to stocks and none of it is left to lower performing long-term assets like cash and bonds. Please refer to the material under the page “Why Equity Investing” if you still don’t agree or need more clarification on the importance of this item.

Please do your own research on funds in your plan before selecting your investments so that you understand the investment’s risks and expenses.

Fund TypeFund DescriptionAllocations
Cash-like options: 0%
Stable Value FundThese “cash-like” funds are only available in 401(k) plans, and have historically offered higher yields than regular money market funds due to their ability to invest in more riskier and complex short-term debt.0%
Short-Term TreasuryThese funds tend to invest in only short-term government debt. Since the yield curve is so low as seen in our Investment Classes page these funds are yielding less than 1%.0%
High Income Money MarketMoney market funds primarily invest in short-term government and company debt, but due to the low rate environment, they also continue to yield next to nothing.0%
Fixed-Income options: 0%
Short-term bondShort-term funds invest in debt that is due in generally less than 3-5 years. These funds can invest in a variety of bonds including government and company debt.0%
Medium-term bondThese funds will take on more risk than short-term bonds by buying longer-term debt, but long-term returns still are unfavorable to stock/equity investments0%
High-yield/Foreign bondA fund that advertises “high-yield” debt means they are investing in “junk” bonds, or those that have low credit quality and thus offer higher yields. They may also invest in bonds outside of the U.S.0%
Equity fund options: 100%
Large Cap GrowthBig companies that have growth prospects. These funds generally have a high concentration of companies with higher “P/E” ratios which signifies that they are expected to grow their earnings.25 – 30%
Large Cap ValueBig companies that have lower valuations relative to growth companies. These funds will look for stocks that may pay a dividend and have a P/E ratio that is below the overall market.25 – 30%
Small/Medium Cap GrowthThese funds look for smaller sized companies that fit the “growth” criteria mentioned above. It is good to have diversification among different sized companies as well as different industry types.5 – 10%
Small/Medium Cap ValueSmaller companies that may pay a dividend and have below-market valuation ratios.5 – 10%
International – Europe/PacificSo far we have diversified among different types of companies in different industries and different sized companies. Now we are going to add further diversity to lower overall risk by investing in companies outside of the U.S. This fund will invest in larger, more established economies like countries within Western Europe and developed Asian countries like Japan.15 – 20%
International – Emerging MarketsEmerging economies also offer attractive growth opportunities as their economies are rapidly expanding, but stock investments in these countries are normally more volatile than U.S. companies. These funds will buy stock in companies from countries such as Brazil, Russia, India, China, and many other smaller nations with above-average economic growth rates.5 – 10%
Index FundsThese funds are designed to mirror movement in major indices like the S&P 500. These funds are attractive in many cases due to their low fees and broad diversification. If the majority of your fund options have high expense ratios then you will likely be better served to pursue an index fund if they are available. Then also obtain some international exposure on top of your US equity-based index option.0 – 80%
Company StockEmployers sometimes provide some of your matching money in the form of company stock, and they also give you the option to buy more shares in your plan. Be sure that this allocation doesn’t exceed 5-10% at any time as you don’t want to have a large chunk of your retirement savings reliant on one investment. There are examples of employees in firms like Enron who had 50%+ allocations to company stock that unfortunately got half of their retirement account wiped out when the firm unexpectedly declared bankruptcy.0 – 5%
Target date funds: 0%
Retirement funds 2015, 2020, 2025 …These funds are relatively new investment vehicles that offer investors automatic rebalancing of their investments from riskier investments (stocks) into safer investments (bonds, cash) as they approach retirement. But, we are so far away from retirement, and funds for our generation in certain cases inappropriately allocate up to 20% to cash and bonds…money that could be earning higher returns over the long-term in stocks.0%