What You Really Need to Know

When it comes to 401(k) fund choices, more can be less when it comes to your ability to make good investment choices.

To be sure, employers have been generous in the number of options they offer in 401(k)s. According to recent overview, “In 2020, the average large 401(k) plan offered 28 investment options, of which about 13 were equity (stock) funds, three were bond funds, and nine were target-date funds.”

The research, published by Brightscope and ICI, breaks down options across investment varieties:

• Mutual funds held 40 percent of large private sector 401(k) plan assets in the sample in 2020.
• Collective investment trusts (CITs) held 38% of assets.
• Guaranteed investment contracts (GICs) held 6 percent,
• Separate accounts held 3 percent, and the remaining 12 percent was invested in individual stocks (including company stock), individual bonds, brokerages and other investments.
• Index funds are a significant component of 401(k) assets, holding 41 percent of 401(k) assets in 2020. Index funds are widely available in all plan sizes.
• More than 95 percent of 401(k) plans with more than $10 million in plan assets offered index funds in their plan lineup in 2020, while 86 percent of 401(k) plans with less than $1 million did so .

Are more choices for 401(k) savers better or worse? If they trigger choice anxiety or bad decisions, more is not better.

I know if you’re looking at your 401(k), it’s like standing in front of a buffet. What do you consume? It’s a tough choice that leads to bad decisions. I will focus on three goals:

1. Look carefully at the expense ratios. Funds with a lower cost index will allow you to save the most money over time.
2. Diversify widely. You should have index funds that invest around the world. If your employer offers “global” stock and bond index funds, these are easy options. As Vanguard founder Jack Bogle used to say, “why pick individual funds when you can own the whole basket?”
3. How long will it be before you retire? Those closer to retirement should have lower overall risk — in every market. You can consider target-date funds, which reduce risk as you get older, but keep an eye on expenses. Some can be prohibitively expensive.

Whatever you do, seek expert advice on what is best for you and your situation. I would suggest hiring one fee-only certified financial planner if you cannot get personalized advice through your employer.