How to Select 401k Investments

Last updated Mar 21, 2021 0

Because most employers allow their workers to self-direct their 401k funds, there are usually a diverse range of investment options open to 401k account holders. If you select sound investments to make with your 401k money, you could wind up realizing excellent profits down the road–profits that may otherwise have been outside your grasp.

Things You’ll Need

Financial advisor (recommended
Self-directed 401k account

6 Steps to Select 401k Investments

1. Review the Summary Plan Description (SPD) outlining company policy on employee investing of 401k funds.

If your employers place any restrictions on where and how you are allowed to invest your 401k money, they’ll be included here. Access the SPD by speaking to the administrator of your 401k account.

2. Hire an independent financial advisor, or consider opening a brokerage account with a financial institution that facilitates employee investing of 401k monies.

You’re also going to want to take time to read books and take classes on sound investing practices if you have little experience with personal finance.

3. Make a list of investment options, in accordance with any restrictions your employer has placed on your plan or by taking advantage of the opportunities offered by the brokerage you’re working with.

Some brokerages offer specially-directed funds designed exclusively for 401k investing.

4. Select several different types of investments if you wish to direct your 401k monies outside brokerage hedge funds.

Depending on where you’re allowed to invest, you’ll want to balance riskier investments like stocks with safer short-term investments like money market mutual funds and government securities.

5. Use your 401k money to finance your first home.

Though you should select this kind of approach only if you have no other avenues available to finance a mortgage, the advantage is that you do acquire another long-term investment (your home) by trading one off (your retirement funds).

6. Funnel any profits you realize through investing back into your 401k account.

When you enroll in a 401k, you’ll be allowed to determine the maximum amount you’re allowed to contribute per year. Using your profits to fund 401k deposits can help you avoid taxes on your investment earnings.

Tips & Warnings

Consider taking advantage of any investing programs your employer has in place offering company shares through 401k accounts. This is a good idea if the company you work for is experiencing solid growth.
Always have a diverse investment portfolio. One unfortunate market turn can mean heavy losses of your retirement savings if you have all your 401k money invested in one place.