Your 401(K) Choices: Impact On Retirement Security

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds. Target-date funds are the way “you’re least likely to make mistakes”. A 401(k) is a type of qualified retirement plan and is primarily for retirement savings.

Time in the market mitigates risk

Time in the market mitigates the risk of investing in a 401K. Investing in the market should be a long-term endeavour and a 401K is a long-term account. If you invest in a fund that tracks the market, you will have ups and downs but the general trend over time is upward. You will not lose all of your money unless the stock market completely crashes and never recovers, which is unlikely. You may at times be lower than your original investment or last year's account value, but time will take care of that. Never panic sell no matter how bad it feels.

It is nearly 100% guaranteed that the money you contribute to the 401k now will be worth more by the time you are age 59.5. The S&P 500 has never lost over that large amount of time. Just contribute money to the account and don’t check it. The balance does not matter in the interim. Most plan administrators will auto invest you in an age-based fund.

Buying an individual stock is considered a concentrated risk. A stock can go to zero and you can lose all of your money. That is why it is generally advisable not to invest all of your 401K funds in company stock.

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds. Target-date funds are the way you're least likely to make mistakes. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

Both brokerage and 401(k) accounts are investment accounts, but they serve different purposes. A 401(k) is primarily for retirement savings, while a brokerage account can be used for various financial goals and often offers more control over the investments. A 401(k) is a type of qualified retirement plan. Within it, you can choose from a menu of investment options (generally mutual funds) where your money grows in a tax-advantaged manner. A brokerage account, meanwhile, is a private account where you can buy, sell, and hold whatever securities your broker has access to, including mutual funds, stocks, bonds, and exchange-traded funds (ETFs).

Long-term endeavour

Investing in the market should be a long-term endeavour. A 401K is a long-term account. If you invest in a fund that tracks the market, you are going to have ups and downs but the general trend over time is upward. You will not lose all of your money unless the stock market completely crashes and never recovers. Unlikely. You may at times be lower than your original investment or last year's account value, but time will take care of that. Never panic sell. No matter how bad it feels.

It is nearly 100% guaranteed that the money you contribute to the 401k now will be worth more by the time you are age 59.5. The S&P 500 has never lost over that large amount of time. Just contribute money to the account and don’t check it. The balance does not matter in the interim. Most plan administrators will auto invest you in an age-based fund.

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds. Target-date funds are the way “you’re least likely to make mistakes,” Lazaroff said. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

Buying an individual stock is considered a concentrated risk. A stock can go to zero and you can lose all of your money. That is why it is generally advisable not to invest ALL of your 401K funds in company stock.

A 401(k) is primarily for retirement savings, while a brokerage account can be used for various financial goals and often offers more control over the investments. A 401(k) is a type of qualified retirement plan. Within it, you can choose from a menu of investment options (generally mutual funds) where your money grows in a tax-advantaged manner. A brokerage account, meanwhile, is a private account where you can buy, sell, and hold whatever securities your broker has access to, including mutual funds, stocks, bonds, and exchange-traded funds (ETFs).

Ups and downs

Investing in the market should be a long-term endeavour and a 401K is a long-term account. Time in the market mitigates the risk and you will not lose all of your money unless the stock market completely crashes and never recovers. Unlikely. You may at times be lower than your original investment or last year's account value, but time will take care of that. Never panic sell. No matter how bad it feels.

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds. Target-date funds are the way “you’re least likely to make mistakes”, Lazaroff said. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

Buying an individual stock is considered a concentrated risk. A stock can go to zero and you can lose all of your money. That is why it is generally advisable not to invest ALL of your 401K funds in company stock.

It is nearly 100% guaranteed that the money you contribute to the 401k now will be worth more by the time you are age 59.5. The S&P 500 has never lost over that large amount of time. Just contribute money to the account and don’t check it. The balance does not matter in the interim. Most plan administrators will auto invest you in an age-based fund.

Target-date funds least risky

Target-date funds are one of the easiest and least risky routes to take when investing in a 401(k). These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, shifting toward more conservative investments as you near retirement.

A target-date fund’s portfolio mix of assets and degree of risk becomes more conservative as it approaches its objective target date. Higher-risk portfolio investments typically include domestic and global equities. Lower-risk portions of a target-date portfolio typically include fixed-income investments such as bonds and cash equivalents. Most fund marketing materials show the allocation glide path—that is, the shift in asset allocation—across the entire investment time horizon. The funds structure their glide rate to achieve the most conservative allocation right at the specified target date. Some target-date funds, known as “through” funds, will also manage funds to a specified asset allocation past the target date.

A target-date fund, or TDF, is an investment fund that is rebalanced periodically to optimize returns over the long term. The asset allocation of a TDF gradually shifts to more conservative investment choices, reducing the risk of losses as the target date approaches. This shift across asset classes is called a “glide path.” A fund’s glide path is designed to reduce investment risk over time—but glide paths can vary considerably from fund to fund. While target-date funds aim to reduce risk overtime, they—like any investment—are not risk-free, even when the target date has reached.

When investing in your 401(k) or other retirement savings account, target-date funds, also known as life-cycle funds, are one popular option. You pick a fund that is dated around when you plan to retire, and that fund promises to rebalance—that is, shift the risk profile of its investments—as you approach that date. Target-date funds are designed to help manage investment risk. You pick a fund with a target year that is closest to the year you anticipate retiring, say a "2050 Fund." The closer a fund gets to its target date, the more it focuses on assets that traditionally have a lower risk profile, such as fixed income, cash and cash equivalents.

Company stock concentrated risk

Investing in company stock is considered a concentrated risk because a stock can go to zero and you can lose all of your money. It is generally advisable not to invest all of your 401K funds in company stock.

A 401K is a long-term account and investing in the market should be a long-term endeavour. If you invest in a fund that tracks the market, you are going to have ups and downs but the general trend over time is upward. You will not lose all of your money unless the stock market completely crashes and never recovers. This is unlikely. You may at times be lower than your original investment or last year's account value, but time will take care of that. Never panic sell. No matter how bad it feels.

When you contribute to your 401(k) account, your money is invested according to your choices from the options your employer offers. These typically include an assortment of target-date funds and mutual funds. Target-date funds are the way you're least likely to make mistakes. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement. “You might be different from the average, and you might accumulate enough wealth one day where a target-date fund isn’t the most appropriate. But for many people, it’s one of the easier and least risky routes to take,” Lazaroff says.

A 401(k) is primarily for retirement savings, while a brokerage account can be used for various financial goals and often offers more control over the investments. A 401(k) is a type of qualified retirement plan. Within it, you can choose from a menu of investment options (generally mutual funds) where your money grows in a tax-advantaged manner. A brokerage account, meanwhile, is a private account where you can buy, sell, and hold whatever securities your broker has access to, including mutual funds, stocks, bonds, and exchange-traded funds (ETFs).

Frequently asked questions