Uncover Your 401K's Investment Strategy: A Guide To Understanding Your Retirement Plan

A 401(k) is a main retirement vehicle for American workers to save for retirement. When you contribute to a 401(k) plan, the funds are invested in various investments such as mutual funds, exchange-traded funds, company stock, and other investments. These investments have different risk levels, and they range from conservative to aggressive.

Where does 401(k) money go?

A 401(k) is one of the main retirement vehicles that American workers use to build up a retirement nest egg. Workers enjoy various tax benefits, and the automated contributions make 401(k) a valuable financial instrument to accumulate retirement savings. When you contribute to a 401(k) plan, the funds are invested in various investments such as mutual funds, exchange-traded funds, company stock, and other investments. These investments have different risk levels, and they range from conservative to aggressive.

Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky. If a company offers automatic enrollment in its retirement plan, the employer picks default investments for new employees to invest in. The default investments are often conservative funds that the federal government has approved. An employee can decide to continue investing in the default investments or allocate the contributions to different investments provided in the employer's investment plan.

The plan administrator keeps track of the company’s 401(k), handling management details and making sure that the plan runs smoothly. Your sponsor also chooses your plan provider, typically a financial services company that offers investment products, plan administration and recordkeeping services. When you enroll in a 401(k) plan, you authorize your employer to withhold a certain percentage, or a specific dollar amount, of your gross pay each pay period and put it into an account that’s been set up in your name. As a rule, your employer must deposit your contributions into your account within 15 business days after the end of the month in which the money is deducted from your pay.

How to invest your 401(k)?

A 401(k) is one of the main retirement vehicles that American workers use to build up a retirement nest egg. Workers enjoy various tax benefits, and the automated contributions make 401(k) a valuable financial instrument to accumulate retirement savings. When you contribute to a 401(k) plan, the funds are invested in various investments such as mutual funds, exchange-traded funds, company stock, and other investments. These investments have different risk levels, and they range from conservative to aggressive.

If a company offers automatic enrollment in its retirement plan, the employer picks default investments for new employees to invest in. The default investments are often conservative funds that the federal government has approved. An employee can decide to continue investing in the default investments or allocate the contributions to different investments provided in the employer's investment plan.

The plan administrator keeps track of the company’s 401(k), handling management details and making sure that the plan runs smoothly. Your sponsor also chooses your plan provider, typically a financial services company that offers investment products, plan administration and recordkeeping services. When you enroll in a 401(k) plan, you authorize your employer to withhold a certain percentage, or a specific dollar amount, of your gross pay each pay period and put it into an account that’s been set up in your name.

Clearly you’re better off putting your cash to work. But how? The answer is a careful asset allocation, the process of deciding where your money will be invested. Asset allocation spreads out risk. Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky.

Some people think investing is too risky, but the risk is actually in holding cash. That’s right: You’ll lose money if you don’t invest your retirement savings. Let’s say you have $10,000. Uninvested, it could be worth less than half that in 30 years, factoring in inflation. But invest 401(k) money at a 7% return, and you’ll have over $75,000 by the time you retire — and that’s with no further contributions.

What are the default investments?

When you enroll in a 401(k) plan, you authorize your employer to withhold a certain percentage, or a specific dollar amount, of your gross pay each pay period and put it into an account that’s been set up in your name. The employer picks default investments for new employees to invest in. These default investments are often conservative funds that the federal government has approved. An employee can decide to continue investing in the default investments or allocate the contributions to different investments provided in the employer's investment plan.

Mutual funds are the most common types of investment offerings in a 401(k) plan, and they spread the money across multiple investments. The plan administrator keeps track of the company’s 401(k), handling management details and making sure that the plan runs smoothly.

The risk levels of these investments range from conservative to aggressive. Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky.

If a company offers automatic enrollment in its retirement plan, the employer picks default investments for new employees to invest in. The default investments are often conservative funds that the federal government has approved. An employee can decide to continue investing in the default investments or allocate the contributions to different investments provided in the employer's investment plan.

Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky.

What is asset allocation?

Asset allocation is the process of deciding where your money will be invested. Stocks are the riskiest way to invest, while bonds and other fixed-income investments are the least risky. Mutual funds are the most common types of investment offerings in a 401(k) plan, and they spread the money across multiple investments.

When you contribute to a 401(k) plan, the funds are invested in various investments such as mutual funds, exchange-traded funds, company stock, and other investments. These investments have different risk levels, and they range from conservative to aggressive.

If a company offers automatic enrollment in its retirement plan, the employer picks default investments for new employees to invest in. The default investments are often conservative funds that the federal government has approved. An employee can decide to continue investing in the default investments or allocate the contributions to different investments provided in the employer's investment plan.

When you enroll in a 401(k) plan, you authorize your employer to withhold a certain percentage, or a specific dollar amount, of your gross pay each pay period and put it into an account that’s been set up in your name. As a rule, your employer must deposit your contributions into your account within 15 business days after the end of the month in which the money is deducted from your pay.

The plan administrator keeps track of the company’s 401(k), handling management details and making sure that the plan runs smoothly. Your sponsor also chooses your plan provider, typically a financial services company that offers investment products, plan administration and recordkeeping services.

How does the plan run?

A 401(k) is one of the main retirement vehicles that American workers use to build up a retirement nest egg. Workers enjoy various tax benefits, and the automated contributions make 401(k) a valuable financial instrument to accumulate retirement savings. When you contribute to a 401(k) plan, the funds are invested in various investments such as mutual funds, exchange-traded funds, company stock, and other investments. These investments have different risk levels, and they range from conservative to aggressive.

When you enroll in a 401(k) plan, you authorize your employer to withhold a certain percentage, or a specific dollar amount, of your gross pay each pay period and put it into an account that’s been set up in your name. As a rule, your employer must deposit your contributions into your account within 15 business days after the end of the month in which the money is deducted from your pay. The plan administrator keeps track of the company’s 401(k), handling management details and making sure that the plan runs smoothly. Your sponsor also chooses your plan provider, typically a financial services company that offers investment products, plan administration and recordkeeping services.

Some people think investing is too risky, but the risk is actually in holding cash. That’s right: You’ll lose money if you don’t invest your retirement savings. Let’s say you have $10,000. Uninvested, it could be worth less than half that in 30 years, factoring in inflation. But invest 401(k) money at a 7% return, and you’ll have over $75,000 by the time you retire — and that’s with no further contributions. Clearly you’re better off putting your cash to work. But how? The answer is a careful asset allocation, the process of deciding where your money will be invested. Asset allocation spreads out risk. Stocks — often called equities — are the riskiest way to invest; bonds and other fixed-income investments are the least risky.

If a company offers automatic enrollment in its retirement plan, the employer picks default investments for new employees to invest in. The default investments are often conservative funds that the federal government has approved. An employee can decide to continue investing in the default investments or allocate the contributions to different investments provided in the employer's investment plan. However, there are different rules on how the employer’s contribution is invested; some employers may decide how the 401(k) match is invested, while in other companies, employees decide how to invest the matching contributions.

Frequently asked questions