Easily one of the most daunting tasks of managing your 401(k) is choosing the specific funds to invest in. How do you know which funds are best suited to meet your needs? Unfortunately none of us has the crystal ball that will provide you with all the right answers, so in the meantime here are some recommendations that I share with my clients when selecting investment options within their 401(k).
- Most 401(k) plans have between 10-25 different funds that you can invest in. Instead of choosing eight, nine, or even ten funds, I often advise folks to pick four, allocating 25% of their contributions to each one. Knowing that most equity funds own between 100-200 individual companies, four funds allows for adequate diversification, along with the ability to easily evaluate performance without spending your entire Saturday morning looking over a statement.
- Learning more about each fund can be tricky when your options for retirement are spelled out on a one-sheet page. - If you're looking for a place to get a basic idea of what the fund's major objectives and holdings are, Morningstar is a good place to start without overwhelming yourself with too much data. You can easily find which category the fund falls into (Large-cap, mid-cap, or intermediate term bond, for example), what companies are owned within the fund, and of course, past performance.
- More on past performance. It can be very easy to look at the one, three, five, and ten year performance numbers of a particular fund. But when it comes to investing, history tells a nice story, but bears no indication of what will happen today, tomorrow, or ten years from now. Instead, consider the tenure of the fund's manager. For instance, Don Taylor has been managing Franklin's Rising Dividends Fund since 1996. A fund manager with a long tenure can offer some better ideas of how past performance can provide an expectation for the future. (Note: I'm not recommending Franklin's Rising Dividends Fund, just illustrating an example).
- Fees. Just because new laws say that the fees you pay to own funds within your 401(k) must be readily disclosed to you, doesn't mean they are. Know this: most mutual funds within your 401(k) carry an annual expense between 0.75% - 1.5%. You never see the fees taken out, but they are. Many 401(k) plans now offer index funds from companies like Vanguard, which have much lower fees, and simply track an index, such as the S&P 500. They can be fine investment choices within your 401(k) where options can typically be somewhat limited.
Personally, I believe that making decisions that will directly impact your financial future should never be something you have to do alone. If you'd like to get some advice on how to maximize the performance within your own 401(k), don't hesitate to ask.
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).