Three ways to invest your 401(k) savings

When you contribute to a 401(k), you’re given a choice of investments for your savings. Your plan’s investment fund lineup can contain a wide range of investment types, so it’s important to understand what they offer you as you save for retirement. In addition, some plans may offer professionally managed options to reduce the time you need to spend thinking about and monitoring your investments. Before you decide the best way to invest your 401(k) savings, get to know the three most common do-it-yourself and professionally managed investment options.

#1 Do-it-yourself 401(k) plan investing

Your 401(k) plan probably offers several investment types from which to choose. Each can have a different purpose—some attempt to grow your money, while others aim to protect it. Generally, you choose the investment types that you think will help you reach your investment goals over time. And it’s generally recognized that choosing a mix of investment types—also known as diversification across asset classes—can help offer some protection to your savings against market-driven losses.

The asset classes you can find in a 401(k) plan lineup usually fall into broad categories: equity (stocks), fixed income (bonds), and principal preservation (stable value or money market).

401(k) investment categories

Asset class Objective Potential for risk Example
Equity (stocks) Growth High U.S. large company stock fund
Fixed income (bonds) Income and diversification  Medium U.S. bond fund
Principal preservation Safety Low Stable value fund

The asset class represents an internal category that reflects the asset class, market capitalization, characteristics, and management style of the investment option. Neither asset allocation nor diversification guarantees a profit or protects against a loss. 

#2 401(k) investments managed according to your goals

Your 401(k) plan may also offer stand-alone investment options that are managed professionally based on your expected retirement date or on your account growth objectives and your tolerance for risk. The most common stand-alone option is target-date funds (TDFs). They’re called target date because they’re invested based on the date (year) you expect to retire. TDFs are:

  • Made up of multiple underlying investments
  • Broadly diversified and professionally managed
  • Invested with a risk and reward profile based on years until retirement
  • Named according to the year of expected retirement (e.g., 2015 or 2025)

Generally, you choose the TDF with the year that most closely matches the year you plan to retire. The funds inside the TDF are invested according to how much time is remaining before your expected retirement year, gradually adjusting automatically to balance asset growth with principal preservation objectives as you get older.

Other stand-alone investment options include balanced funds and target-risk funds. These funds are also diversified, but they don’t change as you get older. Rather, you choose them according to your ability to tolerate risk and your need for investment growth. In theory, a stand-alone option—whether TDF, balanced, or target risk—is designed to be your sole 401(k) investment.

Although TDFs are managed for investors on a projected retirement date timeframe, the fund’s allocation strategy does not guarantee that investors’ retirement goals will be met. The target date is the year in which an investor is assumed to retire and begin taking withdrawals. The portfolio’s risks are directly related to the risks of the underlying funds, as described. Please see the fund fact sheet and prospectus for more details on these risks. Asset allocation does not guarantee a profit or protect against a loss. Asset allocation may not be appropriate for all participants, particularly those interested in directing their own investments.

#3 A professionally managed 401(k) account

Stand-alone investment options offer professional management, but not investment advice. Some 401(k) plans offer managed accounts, which can provide both savings and investment advice, as well as ongoing professional management.

If you’re unsure of how much to save or if you have outside retirement accounts—such as an old employer’s 401(k) plan or a spouse’s 401(k) plan or IRA—a managed account generally can recommend a savings rate based on your goals, as well as a tailored investment mix that considers your outside accounts. A managed account, thus, provides personalized savings and investment advice using the investment options available in your 401(k) plan. Some managed account services even provide advice on outside accounts and can help you decide how to withdraw your money in retirement.

Making a 401(k) management decision

If you’re an experienced investor—or want to become one—a 401(k) plan lets you pick investments yourself. Alternatively, you may want to simplify the process by electing to invest in a single, professionally diversified option or by getting help from a managed account program. Start by asking your 401(k) plan provider about your investment options, then asking about how to get professional investment management help, if you need it. 

For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges, and expenses before investing. The prospectus contains this and other important information about the investment option and investment company. Please read the prospectus carefully before you invest or send money. Prospectus may only be available in English.

There is no guarantee that any investment strategy will achieve its objectives.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.

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