How to Choose the Best Investments for Your 401(k) Plan

If you’ve recently started a job with an employer that offers 401(k) plans, you may be interested participating to grow your nest egg. But it’s not in your best interest to just sign up, set your desired contributions, and allow your plan administrator to take it from there. A better idea: research investment options and choose those that will give you the best chance of reaching your retirement goals. 

But what if you already have a 401(k) and are looking to revisit the drawing board to maximize your earning potential? Either way, you’ll need to research investments to determine which are most suitable for your financial goals. 

Fortunately, the process to choose the best investments for your 401(k) plan is relatively straight-forward whether you’ve had it for a while or are just getting started. And with the help of a reputable financial adviser, you’ll be able to execute these steps effortlessly. 

Ready to get started? Keep reading for step-by-step instructions on how to choose the best investments  for your 401(k) plan. 

Step 1: Decide on an investment strategy.

What are your investment goals and how does your 401(k) fit into the equation? Simply put, what are you trying to accomplish with your investment vehicles, and how significant is your 401(k) to the desired outcome? Is it at the forefront, in terms of importance, to your investment strategy or does it play a small role? 

While it’s up to you to decide how integral your 401(k) role will be, it’s a good idea to diversify your investments across multiple vehicles. Why so? Simply put, most plan administrators limit the scope of these plans, leaving you with very little flexibility with regard to what types of securities you can invest in. 

Step 3: Draft up an investment plan. 

Before deciding on investments for your 401(k), determine how it will fit into your overall investment strategy. Next, you’ll want to put your investment plan in writing. It should include:

  • The amount of your biweekly, monthly, or quarterly contributions
  • Investment vehicles, including your 401(k) plan, Traditional IRA, Roth IRA, or any other mechanisms you’ll be using to build wealth
  • Types of assets and the corresponding asset allocation strategy 

Once you have your investment strategy and plan intact, the next step is to start researching your options. 

Step 3: Research your 401(k) investment options. 

As mentioned earlier, plan administrators are relatively restrictive with the types of investment choices they give employees. While you’ll have a plethora of mutual funds to choose from, they may not be as vast in scope as you’d like. 

But that doesn’t mean you should ditch what they have to offer altogether, particularly if your employer is offering a match. Instead, request more information on plan offerings and review the contents in their entirety. 

Step 4: Finalize your top 401(k) investment options.

Narrow down your list based on which options most closely align with your investment strategy and will be most effective at helping you accomplish your goals. Stocks, bonds, and mutual funds are ideal, but you should also give strong consideration to index funds as they have a track record of steady performance over time. Furthermore, they’re generally less risky than other investments. 

When finalizing your top choices, also consider any cost implications as steep fees can be a deal-breaker when selecting the best investments for your 401(k) plan. 

Step 5: Make adjustments as necessary. 

As time progresses and market conditions change, you’ll want to adjust your portfolio as needed. It’s not enough to diversify when purchasing investments for your 401(k) plan and expect your portfolio to take care of itself. You’ll need to monitor industry and overall market performance to and possibly trade securities to maintain an effective asset allocation strategy. 

It may also be a good idea to beef up contributions to capitalize on maximum contributions to your 401(k) plan made by your employer. Otherwise, you’ll be leaving free money on the table. 

But once you’ve reached the point where you’ve maxed out 401(k) plan contributions, consider contributing to a Traditional IRA, Roth IRA, or both, to maximize your earning potential and build wealth.