SmartVestor: How to Choose Your 401(k) Selections Like a Pro

SmartVestor June 2024

If you’ve been looking forward to investing for retirement through your company’s 401(k) benefit, the day you receive your enrollment package is an exciting one. Soon you’ll be building your retirement nest egg with the help of your employer’s 401(k) match and the right investment selections—you can’t wait to get started!

So you rip open your envelope and glance over the contents: forms, a nice-looking brochure, and maybe a letter from your employer welcoming you to the company’s 401(k). But once you’ve read the letter, the rest of the materials simply don’t make a lot of sense. There’s information about vesting, beneficiaries, equities, risk assessments and 401(k) selections—but nothing’s clicking.

The only thing that seems clear is that investing in a 401(k) is important business. Your ability to retire someday depends on you getting it right today. But how can you make such major, long-term decisions when you don’t even understand what the choices are?

Good question! Understanding your workplace 401(k) is the first step toward the retirement of your dreams, so let’s dig in to the details!

5 Simple Steps to Choosing Your 401(k) Investments

Ready to dig in? These five steps will help you make smart 401(k) selections you can feel good about. To get the ball rolling, let’s start with the easy stuff and then work our way to the more complicated parts.

Step 1: Start with your Plan Document

The best place to start making your 401(k) selections is your company’s plan document. This document gives you all the important details specific to your company’s retirement plan, like the employer match and vesting schedule.

What’s a vesting schedule? It’s an outline for when the money your company contributes to your 401(k) is completely yours. The money you put into the 401(k) and its growth are always yours. But many companies require you to remain employed a certain number of years before the money they put into your 401(k) is 100% yoursWith each year of employment, a bigger percentage of the employer match is yours to take with you if you leave your job.

If your 401(k) comes with an employer match, congrats! It’s a great benefit that will help you reach your retirement goals that much faster. When you’re ready to invest (that means you’re debt-free with a fully funded emergency fund), you should invest enough in your 401(k) to receive the full match. That’s an instant 100% return on your money! Some plans let you decide how to invest your employer’s matching contributions, but others leave it up to the employer, so they may offer you matching contributions in company stock.

The plan document also includes information about the fees related to your 401(k), the services available to you, and how to make changes to your 401(k) investments.

Your Action Step: The more you understand about the specifics of your 401(k) plan, the more confident you’ll be. If you don’t have a copy of your plan document, contact your HR department. They should be able to give you a copy or tell you where to find one.

Step 2: Don’t Overlook Your Beneficiary Designation Form

Anyone who’s filled out a life insurance application is familiar with a beneficiary form. This is where you state who will receive your 401(k) money if you die. If you’re married and have kids, this probably won’t be a tough decision.

However, this is one form people tend to truly fill out and forget. In some cases, people have divorced and are remarried, but their 401(k) would still go to their ex if they died because they never updated their beneficiaries. Other times, the investor may have had children, but forgot to add them to the form.

Your Action Step: If it’s been a while since you filled out your 401(k) beneficiary form, contact your 401(k) plan manager to make sure those funds end up where you want them.

Step 3: Complete Your Plan Enrollment Form

This is the form you’ve been waiting for! It’s the one you’ll use to officially commit a percentage of your paycheck to saving for retirement. But there are a couple of other things about this form you don’t want to miss:

Traditional 401(k) vs. Roth 401(k): Which One Is Better? 

What’s the difference between a traditional 401(k) and a Roth 401(k)? A traditional 401(k) allows you to make contributions from your pay before taxes are taken out of your pay. That means you get a tax break now, but you’ll have to pay taxes on the money you withdraw when you retire.

But when you contribute to a Roth 401(k), your contributions are made after taxes are taken out of your pay. You pay taxes on that money now so you can enjoy tax-free growth and tax-free withdrawals in retirement. That’s why we always recommend the Roth option if your plan offers one!

Your Action Step: Contact your 401(k) plan manager to find out if you have the option to choose pretax or after-tax contributions. If you can, take advantage of the Roth option with your next paycheck!

Step 4: Learn About Your Investment Options

Your brochure or booklet will probably include at least three or four investment choices as part of your company’s plan, but you could even see a dozen or more—plus several alternatives to those pre-packaged options. They may offer you anything from company stock to variable annuities to mutual funds, so let’s go over the basics of common investment options you might see on your employer’s plan:

Target Date Funds

Chances are your company plan’s brochure or booklet makes a big push for target date funds. Target date funds are mutual funds that have predetermined investment mixes depending on the date you plan to retire. You’ll start out with a decent mix of growth stock mutual funds, but as your retirement date gets closer, the mix will become more and more conservative. We don’t recommend target date funds because by the time you’re ready to retire, your 401(k) will be mostly invested in bonds and money markets that won’t give you the growth you need to support you through 30-plus years of retirement.

Company Stock and Employee Stock Purchase Plans (ESPPs)

Work for a publicly traded company? If so, then you may have the option of investing in company stock. You may even be offered an ESPP (employee stock purchase plan), either when you start or after you’ve worked at your company for a certain period of time. An ESPP allows employees to buy company stock at a discount through a payroll deduction.

A discount on company stock? Sounds great! But not so fast. Remember company stock and ESPPs are single stocks, and we never recommend investing in single stocks for retirement. Putting all your eggs in one basket when it comes to the stock market is risky, even if that basket is the shiny new company you work for.

Mutual Funds

Speaking of better options, let’s talk mutual funds. 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.


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. Fixed annuities are just what they sound like—a glorified savings account with a fixed interest rate (currently 5% or less). Sounds easy and predictable, but that low rate of return won’t stand a chance against the rate of inflation.

Variable annuities are a little more complex. They’re basically mutual funds under the umbrella of an annuity. And those payments you’ll receive throughout retirement will depend on the performance of those mutual funds—that’s why they’re called variable. Better than a fixed annuity, but here’s why we still don’t recommend any kind of annuity:

  1. Too many fees! Seriously. You could be paying commissions, insurance charges, rider charges, investment management fees, and surrender charges with annuities. No thanks! We’ll pass.
  2. Annuities are hard to transfer. If you start with an annuity but want to transfer your hard-earned money into a better investment down the road, like a Roth 401(k), you’ll be paying—you guessed it—more fees.
  3. Annuities are confusing. There are so many details and extra features to consider, let alone the fees coming at you from every angle. They’re just not worth all the extra trouble.

That’s why you should reach out to an investment professional who can sit down with you and go over each of your 401(k) investment options. It’s your money and your retirement, so why not learn as much as you can before setting up your 401(k) investments?

Your Action Step: Get in touch with a financial advisor to go over your 401(k) investing options. Learn as much as you can about your options so you can make informed decisions.

Step 5: Pick Your 401(k) Investments

Without a thorough understanding of your 401(k) options, it’s easy to make bad investing choices, but we’ve discussed the most common options you’re likely to see on your employer’s 401(k) plan. Company stock and ESPPs are single stocks, and you’ll want to avoid the risk of putting all your money into single stocks. Annuities, even variable annuities, are too complicated and have way too many fees. Mutual funds, on the other hand, offer built-in diversification and professional management. That’s why out of all your 401(k) options, we recommend sticking with mutual funds!

So let’s look at which mutual funds we recommend and which you should avoid, because getting your investments right today means you can enjoy your retirement later, whether it’s 10 or 40 years down the road, laying out on a sandy beach or taking the family on a dream cruise!

The Benefits of Choosing Mutual Funds

Stocks go up and down—it’s just the nature of the market. So owning stock in a single company is risky. But mutual funds contain stocks (or bonds) from many different companies, so you’re lowering your risk. When one of those companies’ stock value falls, it has a minimal effect on the value of the mutual fund. Stock values may rise or fall for those individual companies, but over time, the value of the mutual fund should still go up. Sweet!

To further minimize your risk, we recommend spreading your investments evenly between these four types of mutual funds:

  • Growth and income funds: You may hear these types of funds referred to as large value or large-cap. They’re usually large, well-established American companies with household names you would instantly recognize because they offer goods or services that we all use regardless of how the economy is doing. Because they’re pretty predictable as far as performance goes, these funds will create a stable foundation for your portfolio.  
  • Growth funds: To add some variety to your portfolio, allocate 25% of your investments to growth funds. These are companies whose records aren’t quite as predictable as those in the growth and income funds category. They go up and down with the market, but they show steady growth over time. Growth funds are also called mid-cap or equity funds.
  • Aggressive growth funds: If growth and income funds are holding down the predictable and stable side of the mutual funds scale, aggressive growth funds are having a party on the opposite side. These funds often invest in smaller, newer companies (like start-ups or small businesses), so there’s a little more risk involved, but the payoff could be bigger too.
  • International funds: Also called foreign or overseas funds, international funds are great for a couple of reasons. First, they allow you to invest in non-U.S. companies. Secondly, they help spread out risk and diversify your portfolio.

If you put 25% of your 401(k) into each of these types of mutual funds, you’ll spread out your risk and ensure that you’re not putting all your eggs into one basket.

How Do I Choose My Mutual Funds

We’ve laid out a proven plan for you to follow when investing in your 401(k), but applying this plan to your company plan’s stock options might seem like putting a jigsaw puzzle together.

But keep it simple and stick with a mix of the four types of mutual funds we mentioned earlier—growth and income, growth, aggressive growth, and international. And make sure you look for funds that have a long track record of strong returns, which means the funds you choose should be at least 10 years old and regularly outperform other mutual funds in their category over time.

A lot of people don’t know you can work with an outside professional to select your 401(k) investments, but you can! Other investors worry that working with their own investing pro will be expensive. Your investment professional may charge a one-time fee for a 401(k) consultation, and that’s a reasonable cost for the time they spend to help you make smart 401(k) selections. Just make sure you know what to expect before your appointment so there are no surprises.

Work With an Investing Pro

Still have questions about 401(k) investment options? Our SmartVestor program can connect you with an investing pro who serves your area. They can look at your 401(k) investment options and help you make informed decisions about your financial future.