Smart 401(K) Choices: Maximizing Your Retirement Savings

Choosing investments for your 401(k) can be a daunting task, but it's important to remember that the best strategy is often to leave your account alone and let the contributions build. Diversifying your investments is key, and this can be achieved by spreading your investments across different sectors and mutual funds. Index funds are also a good option as they follow a market benchmark, like the S&P 500, and are inexpensive for financial companies to manage. When picking your investments, look for funds with a long track record of strong returns and consider the general mix of stocks and bonds.

Diversify your investments

When picking your 401(k) investments, try to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns.

Mutual funds are professionally managed investments that allow investors to pool their money together to invest in dozens, sometimes hundreds of companies at once. With mutual funds, you don’t have the same amount of risk that comes with single stocks. Instead, you’re spreading your investments across many different companies with built-in diversification.

An index tracking the S&P will give you exposure to large U.S. companies, but you can also add an international fund and a fund that invests in smaller companies for broader exposure.

Beyond fees, you also want your investments to be diverse, or spread across different sectors. You can likely achieve this diversity and low cost via an index fund. These funds follow a market benchmark, like the S&P 500, so they cover large swaths of the market and are inexpensive for financial companies to manage. Investing in index funds is known as "passive investing," because fund managers aren't actively picking companies they think will perform well; they're simply following a stock index.

Once you've picked your investments, the best thing you can do is leave your account alone and let the contributions build. In addition to low costs and diversity, consistently investing over time — i.e., every paycheck — will make the biggest difference in the size of your savings.

Consider the mix of stocks and bonds

When picking your 401(k) investments, try to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns.

Diversification is important because it spreads your investments across many different companies, reducing the risk that comes with single stocks. Mutual funds are professionally managed investments that allow investors to pool their money together to invest in dozens, sometimes hundreds of companies at once.

An index tracking the S&P will give you exposure to large U.S. companies, but you can also add an international fund and a fund that invests in smaller companies for broader exposure. Beyond fees, you also want your investments to be diverse, or spread across different sectors. You can likely achieve this diversity and low cost via an index fund. These funds follow a market benchmark, like the S&P 500, so they cover large swaths of the market and are inexpensive for financial companies to manage. Investing in index funds is known as "passive investing," because fund managers aren't actively picking companies they think will perform well; they're simply following a stock index. It's a strategy Buffett recommends. "Consistently buy an S&P 500 low-cost index fund," he said. "I think it's the thing that makes the most sense practically all of the time."

Look for funds with a strong return history

When picking your 401(k) investments, try to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns.

Mutual funds are the most common type of investment choice offered by 401(k) plans, and with good reason. Mutual funds are professionally managed investments that allow investors to pool their money together to invest in dozens, sometimes hundreds of companies at once. With mutual funds, you don’t have the same amount of risk that comes with single stocks. Instead, you’re spreading your investments across many different companies with built-in diversification.

Diversity is important. You can likely achieve this diversity and low cost via an index fund. These funds follow a market benchmark, like the S&P 500, so they cover large swaths of the market and are inexpensive for financial companies to manage. Investing in index funds is known as "passive investing," because fund managers aren't actively picking companies they think will perform well; they're simply following a stock index.

Annuities are also one of the options on your employer’s 401(k) plan. The basic idea of an annuity is that you make payments to an insurance company, and in return, they promise to grow your money and send you payments when you retire, giving you a steady stream of income throughout your retirement.

Once you've picked your investments, the best thing you can do is leave your account alone and let the contributions build. In addition to low costs and diversity, consistently investing over time — i.e., every paycheck — will make the biggest difference in the size of your savings.

Consider index funds

When picking your 401(k) investments, diversification is key. You can likely achieve this diversity and low cost via an index fund. These funds follow a market benchmark, like the S&P 500, so they cover large swaths of the market and are inexpensive for financial companies to manage. Investing in index funds is known as "passive investing", because fund managers aren't actively picking companies they think will perform well; they're simply following a stock index.

Warren Buffett recommends consistently buying an S&P 500 low-cost index fund. "I think it's the thing that makes the most sense practically all of the time."

An index tracking the S&P will give you exposure to large U.S. companies, but you can also add an international fund and a fund that invests in smaller companies for broader exposure.

Mutual funds are also a good option. They’re the most common type of investment choice offered by 401(k) plans, and with good reason. Mutual funds are professionally managed investments that allow investors to pool their money together to invest in dozens, sometimes hundreds of companies at once. With mutual funds, you don’t have the same amount of risk that comes with single stocks. Instead, you’re spreading your investments across many different companies with built-in diversification.

Annuities are also one of the options on your employer’s 401(k) plan. The basic idea of an annuity is that you make payments to an insurance company, and in return they promise to grow your money and send you payments when you retire, giving you a steady stream of income throughout your retirement.

Compare Roth and traditional 401(k) options

Contact your 401(k) plan manager to find out if you have the option to choose between a Roth 401(k) or a traditional 401(k). We love the Roth option funded with after-tax contributions because your investments will grow tax-free, and you’ll get tax-free withdrawals in retirement.

When picking your 401(k) investments, try to diversify your investments between four types of mutual funds: growth and income, growth, aggressive growth, and international. Look for funds with a long track record of strong returns.

Beyond fees, you also want your investments to be diverse, or spread across different sectors. You can likely achieve this diversity and low cost via an index fund. These funds follow a market benchmark, like the S&P 500, so they cover large swaths of the market and are inexpensive for financial companies to manage. Investing in index funds is known as "passive investing," because fund managers aren't actively picking companies they think will perform well; they're simply following a stock index.

Mutual funds are professionally managed investments that allow investors to pool their money together to invest in dozens, sometimes hundreds of companies at once. With mutual funds, you don’t have the same amount of risk that comes with single stocks. Instead, you’re spreading your investments across many different companies with built-in diversification. You might find annuities as one of the options on your employer’s 401(k) plan. The basic idea of an annuity is that you make payments to an insurance company, and in return they promise to grow your money and send you payments when you retire, giving you a steady stream of income throughout your retirement.

Once you've picked your investments, the best thing you can do is leave your account alone and let the contributions build. In addition to low costs and diversity, consistently investing over time — i.e., every paycheck — will make the biggest difference in the size of your savings.

Frequently asked questions