You’ve signed up for your company’s 401k…great! You’ve allocated how much you will contribute each paycheck…wonderful! You’ve picked your investment options…what?! Most people get steps 1 and 2 done, which are very important, but fail to go the extra mile and pick their investments, which is also very important. When you don’t know how to research your 401k investment options, you’re more likely to throw in the towel.
Since the point of saving for retirement is long-term, the investment options you pick today can benefit you greatly over time. There’s much more to saving for retirement than contributing to your 401k each pay check. You need to be invested in the right options for you. You’re probably thinking, “how do I do that?” Well, I’m going to show you! I am going to walk you through how to research your 401k investment options, so you can pick the best investments for you!
One thing to note is that every 401k or IRA plan is different, but the information is the same. The items I will show you to read up on will be available for every investment option.
First things first
Before you can start researching your investment options, you need to know what options are available to you. Depending on your company, you may have a wide variety of investments to choose from, or a small group. Either way, you will want to ensure you know how to find this information. If you have no idea where your company’s 401k plans are managed, start by contacting HR. They will give you the name of the company who manages your 401k plan. They should also give you next steps to find your 401k plan information.
Once you have the company who manages your 401k plan, set up an online account with them. Again, depending on which company, this may be easy or difficult. If you can’t seem to create an account, start with HR. If they can’t help you, reach out to the company that manages your 401k plan. You may need to create a special type of account to find your 401k information.
After you’ve created your account and found how to see your 401k information, you will want to look for any link pertaining to your portfolio investments. It may say something like “Current Elections”, “Manage my Investments”, “Investment Choices” or “Change my Investment Options”. Once you’ve located this information, the research can begin!
Researching your 401k investment options
Your available options will be broken up into the following categories:
- Bond/Fixed Income
- Money Market/Stable Value
- Target Date/Allocation Funds
Here is a quick overview of what each means:
Equity/Stock – Equity interests (or “stock”) in publicly traded companies. Stock is considered the riskiest form of investment.
Bond/Fixed Income – Fixed income is a form of investment that pays out on a fixed schedule, though the payment amounts can vary. Bonds are the most popular form of fixed income. Bonds are considered less risky, in terms of investment.
Money Market/Stable Value – Stable value funds and money market funds are forms of fixed income. These funds are made up of multiple types of fixed income. They are considered low-risk, stable and yield minimal returns.
Target Date/Allocation Funds – Target Date (or Allocation) Funds are portfolios comprised of different forms of investments (stocks, bonds, stable value funds, etc.) that work to ensure you have enough in your fund to retire by a certain date. These funds change investment overtime, to coincide with when you want to retire.
Under each of these categories, you should see a variety of different options to choose from. If you are young, and looking for the most growth, you will want your portfolio to be majorly (80%) comprised of stocks. If you want no risk, but also minimal growth, you will want your portfolio to be mainly bonds and fixed income. If you want to put in no work picking any type of investment, go with a Target Date or Allocation Fund. Invest in it 100%, and the fund will break that 100% down into different types of investments. Keep in mind, the fund will change over time, regardless of how your portfolio is performing.
Reading Fund Charts
If you decide you don’t want to go with a Target Date Fund, you will need to research how each of the investments perform. You can do this by reading the charts and prospectus associated with each fund. If you are reading the chart directly from the investment company’s website, it may look something like this:
This chart is for the Blackrock US Fundamental Large Cap Growth Fund. The chart may include the very basics of how this particular investment performs. The performance results are shown for the past month (Table 1) and the past quarter (Table 2). Here is what each heading means:
Gross Expense Ratio - represents the percentage of a fund's assets that are used to pay operating expenses, management fees including 12b-1 fees, and administrative fees. The lower this number is, the less this fund costs you to keep.
Total Return – represents how this fund has delivered (in terms of percentage) over the month/quarter and year to date. For example, in the table above, this fund returned .63% for the month of December 2017, returned 7.81% for the last quarter of 2017, and returned 34.64% for the 2017 year. Note: it is possible for any of these numbers to be negative (stocks/funds can lose value). Another thing to note, the, average rate of return, historically, is 8%.
Average Annual Total Return – represents how this fund has delivered (in terms of percentage) over the past year, 3 years, 5 years, 10 years, and since the fund was created (inception). From reading the Total Return heading, we already knew it returned 34.64% in 2017. Now, you can see how it averaged over 3 years (13.17%), 5 years (16.24%) and 10 years (N/A). If you N/A, it means the fund was not around 10 years ago.
If you want to learn even more about each of your investment options, do a Google search. Since your company’s website will only provide the basics, you are better off doing some more research to really understand your fund.
Here is another example. This is the Vanguard S&P 500 Index Trust
We can see here that the Gross Expense Ratio is very low (awesome), but that it shows N/A for any time frame over a month, except Inception (6.24%). That means it is a relatively new fund, and therefore requires research. Doing a Google search for this fund takes you to the Vanguard website (Vanguard is who owns this fund). Visit the fund’s page to follow along.
While visiting the funds page, we are able to confirm that this fund was created in 2016 (relatively new). We are also to see what the fund is comprised of stock from the following companies:
You will also see how well the companies/industries in the fund are expected to perform. Remember, anything over the historical 8% is good. Of course, no one knows the future, these are simply predictions based on a variety of things.
You may not understand everything you’re reading, and that’s fine, but don’t deny the numbers. The goal is to build wealth over time, so you want to look at the growth over the years. If your fund hits a peak at a certain year, then starts to decline, consider selling after the peak year, and purchasing another fund.
The great thing about your investments is that they are yours. You can pick and choose when to sell and when to buy. You can pick and choose to invest in multiple options, or a few. You have the options, so take advantage. Be sure to check in on your portfolio every quarter, at minimum. Remember that wealth builds over time, so if you see something is lower than you’d like, consider waiting it out. There is plenty of time to ride the waves of the market.
Check out my 401k investments. I explain how my portfolio investments are broken down, and how the change resulted in major growth for my 401k plan! Have you taken the time to review your 401k investments? Do you know how to find information about your retirement options? Share your concerns, questions and comments with me and other CGS readers in the comments section below, Also, share what funds you’ve been watching!
The CGS Team