How to Choose What 401(k) Investments Are Right For You

3 min read

Anthony O'neal
How to Choose What 401(k) Investments Are Right For You

Retirement savings and planning is a huge part of creating a life of financial freedom, building a solid foundation for you and your family, and being able to truly retire when you’re ready - without having to worry about having to work.

When you finally get to enroll in your company’s 401(k) plan and look over the options, it can be a bit intimidating. You know that it’s important, but how do you make sure you’re choosing the right 401(k) investments for you and your family? Let me walk you through how you go about choosing the right investment for your financial future. 

5 - Step Process to Choosing an a 401(k) Investment Plan 

It’s helpful to understand some key terms related to your 401(k) before we dive into the steps, so that it’s easier to grasp your options. 

Plan Document: a document that gives you all the information on your company’s retirement plan. Including the employer match if there is one and the vesting schedule

Vesting Schedule: an outline for when the money that your employer contributes to the 401(k), via the employer match, is available to you.

Beneficiary Designation Form: a document that allows you to state who will receive your 401(k) money upon your death. Typically if you’re married or have kids, these will be your beneficiaries. 

Take a Look at Your Plan Document 

The plan document provided by your employer is the best place to start, as it will give you all the information on the retirement plans your company offers, including whether or not they require you to be employed with them for a certain number of years before what they contribute to your 401(k), through the employer match, is yours to keep. This is the vesting schedule we talked about earlier, and it’s an important thing to keep in mind when choosing a retirement plan offered by your employer. 

If your employer does offer a company match, this plan document will go over all the details of how that employer match is invested. Sometimes the company will choose to match your contribution in the form of company stock, other times it’s yours to decide how to invest the match. 

It’s incredibly important to review your employer's plan document before making a 401(k) investment choice to make sure you understand all the options available to you, the fees associated with your investment choice, how your employer’s match, if available, is invested, and the vesting schedule. 

Make Sure to Note Your Beneficiaries

When investing in a 401(k), it’s just as important to think about who will receive that investment money when you pass away. Depending on your age, you may have filled out a similar beneficiary form for life insurance, but when it comes to a 401(k) it’s either forgotten about entirely, or rarely updated. 

Whether you’re married with kids, divorced and remarried, or not married at all, you need to regularly check your beneficiary designation form to make sure it’s the most up to date with who you want to receive your money after you pass. 

Learn More About Investment Options Available

Any good employer offers anywhere from three to four investment choices as part of their 401(k) investment plan. However, in addition to these, you might also have other options such as company stock to variable annuities to mutual funds. So, it’s important you understand the basics of these available options so you can make the best decision for you and your family. 

Target Date Funds 

Essentially, target date funds are mutual funds that have a predetermined investment mix all based on when you plan to retire. At the beginning of these target date funds there will likely be a balanced mix of growth stock mutual funds and as you get closer to your retirement age, this mix will become significantly more conservative in nature. 

The problem with these target date funds is that by the time you reach retirement age, your 401(k) investments will mostly be in bonds and money markets that will not give you the financial freedom and growth you need to retire without having to worry about working to keep up your lifestyle. 

Company Stock and Employee Stock Purchase Plans 

You may have the opportunity to invest in company stock if the company you work for is a publicly traded company. In addition, depending on the company’s policies, you may have the opportunity to invest through an Employee Stock Purchase Plan (ESPP), which allows employees to purchase company stock at a discounted price through a payroll deduction, similar to how you’d get a payroll deduction for your employer insurance. 

The issue of investing in company stock this way is that they are single stocks. Investing in single stocks for retirement is essentially putting all your eggs in one basket, and all your retirement funds are resting on the profitability of your company and the stock market - which is risky. 

Mutual Funds 

These are by far the most common form of 401(k) investment option because they are professionally managed investments that allow investors to pool their funds together to invest in a ton of different companies at once. This is the complete opposite of putting all your money in a single stock and offers a way to diversify your investment portfolio. 

Mutual funds also don’t hold the same amount of risk associated with single stocks we talked about before because you’re diversifying your investments and spreading your funds across different companies that also have built-in diversification. 

Investing in mutual funds as your 401(k) plan is definitely the better option than the other’s we’ve talked about so far and one that a lot of people chose when it comes to their 401(k) plans. 


The concept of an annuity is that you are making payments to an insurance company for which they return by making a promise to grow your money and sending you consistent payments once you reach retirement age and retire. 

There are both fixed and variable annuities. Fixed are basically a savings account which have a current 5% or less interest rate, the down side to this is that your money will face the wrath of inflation when the time comes to retire. 

Variable annuities are more complicated than the fixed annuities because they are mutual funds under the assumption of an annuity. When you retire and the insurance company sends you your consistent payments, those payments are based on the performance of the mutual funds. 

  • Annuities are not recommended because there are way too many fees associated with them including commissions, insurance charges, rider charges, investment management fees, and surrender charges. 
  • Annuities are also incredibly hard to transfer if you start out investing with an annuity but you want to move that money to a different investment option down the road, you’ll likely be hit with more fees. 
  • Finally, they are far more complex than the other options due to details and extra features to consider, they’re truly not worth the extra hassle. 

Determine your 401(k) Investments 

We looked at the most common investment plans you’re likely to see as part of your employer investment options, but which one is recommended? Unfortunately, company stock is not diversified, annuities are far too complex and come with too many fees, so the best option for your 401(k) retirement is mutual funds. 

The Benefits of Mutual Funds 

Due to the inherent nature of the stock market, it fluctuates, so it’s better to have invested in mutual funds that diversify your portfolio and allow you to invest in stocks from a variety of different companies, than owning stock in a single company. 

While mutual funds are significantly better than single stocks, it’s still a great idea to further spread out your investment over these four types of mutual funds. 

  1. Growth and income funds are referred to as large value or large-cap and they’re typically well-established American companies with household names you’d recognize. When it comes to performance, these types of mutual funds are often predictable to give you a foundation for your portfolio. 
  2. Growth funds are a way to add variety to your portfolio by putting aside 25% of your investment into these types of mutual funds. Unlike the previous category, the companies in this category aren’t as predictable and go up and down with the rest of the market, but they have the ability to show steady growth over time. 
  3. Aggressive growth funds are the riskier side of mutual funds because they are primarily smaller or newer companies such as start-ups. That being said, there’s a chance for a bigger payoff in the long run. 
  4. International funds are also called foreign or overseas funds which allow you to invest in non-U.S. companies and can help you diversify your portfolio.

Make it Official by Completing Your Plan Enrollment Form 

Once you’ve nailed down the type of 401(k) investment plan you want to enroll in, it’s time to fill out the plan enrollment form to actually start contributing a percentage of your paycheck to your retirement. 

Make sure you’ve determined whether you’re contributing to a traditional 401(k) or a Roth 401(k). A traditional 401(k) allows you to make contributions before you pay taxes, and you’re required to pay taxes on the money once you’ve reached retirement age. A Roth 401(k) allows you to contribute money after taxes and you then don’t need to pay taxes on the money once you’ve reached retirement age. 

Let’s Recap

When it comes to investing in a 401(k), it’s something that’s critical for your financial future and being able to retire without having to worry about needing a job to continue your lifestyle. The sooner you start investing in your 401(k) the more you will have come retirement, but the next best time to start is now. 

We went over all the various types of 401(k) plans you’d see in your employer-offered benefits and how to make sure you’re choosing the right one. To keep it simple, you’ll want to start with a mix of the four types of mutual funds we covered and make sure you look for funds that have a history of positive returns. 

It’s incredibly important to diversify your retirement investments to properly plan for your retirement – the sooner you start the better off you’ll be once you reach retirement age.

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