3 Investing Tips All 401(k) Savers Need to Know

You’ll often hear that if you want to retire comfortably, you’ll need to build some savings. You can’t expect to manage your bills with ease in retirement on only a monthly Social Security check.

Now you have choices when it comes to building a retirement nest egg. And if you have access to a 401(k) plan through your employer, it could pay to participate — especially if there’s an employer match to enjoy.

But it’s not enough to make contributions to a 401(k) plan and call it a day. You need to make sure you’re investing your savings strategically so that your money is able to grow nicely over time. With that in mind, here are some tips for investing your 401(k) for success.

1. Be wary of target date funds

When you sign up for a 401(k) plan and don’t choose investments, you may find that your money lands in a target date fund. Target date funds are often the default investment choice for 401(k)s, and for good reason — they’re the perfect “set it and forget it” type of fund.

What a target date fund does is adjust your risk profile based on how close or far away you are from the milestone you’re saving for — in this case, retirement. So in the beginning, your target date fund might have you invested more aggressively. But as retirement nears, you’d be shifted into safer assets.

The problem with a target date fund, though, is that it may invest your money too conservatively on a whole. So you may want to choose your own 401(k) investments for better returns.

2. Pay attention to expense ratios

The fees you pay for your 401(k) investments have the potential to erode your returns over time. That’s why it’s very important to pay attention to fees, known as expense ratios.

Generally speaking, you’re looking at much lower fees when you invest your 401(k) in an index fund than in an actively managed mutual fund. And actively managed funds don’t necessarily translate to better performance. So before you decide they’re the superior bet, compare the fees you’re looking at. And also, look at past returns.

3. Make sure to branch out

It’s important to diversify within your 401(k), just as it’s important to diversify your investments in a taxable brokerage account. With a 401(k), you’re generally limited to different funds you can put your money into. But within that setup, you can work to diversify.

One thing you may want to do is spread your money across different sized companies. That could mean investing a portion of your 401(k) in small-cap stocks, which tend to be a bit riskier, a portion in mid-cap stocks, which tend to be less risky than small-cap, and a portion in large-cap stocks, which tend to be established companies.

You can also make changes to the way your 401(k) is invested based on how close to retirement you are. As you inch toward that milestone, you may want to move a good chunk of your money out of stocks to minimize your risk.

It can be a good idea to talk to a financial advisor about how to invest your 401(k). They may be able to offer customized guidance based on where you are in your savings journey.

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