For most Americans, the easiest way to save for retirement is probably the 401k (or 403b). The importance of these types of accounts, sometimes referred to as defined contribution plans, has grown since section 401k was inserted into the US tax code in 1978.
According to Investopedia, only 16% of Fortune 500 companies offered their new hires a pension plan in 2017. The company I work for stopped offering a pension to new hires in 2015, electing to go with a 3% automatic contribution, or non-discretionary contribution, in place of the pension.
We’ve talked about the appropriate levels to contribute to a retirement account (maximize your employer match and work toward contributing at least 15% of your before tax income) in the blog before, but haven’t discussed where to put that money once it’s invested in that retirement account. And, while I believe that the amount of money you put into your retirement accounts is at least as important as where that money goes, it doesn’t hurt to have a little strategy for that money to give yourself the best chances possible to achieve your goals.
Before we get started, I want to point out that you may have access to speak to a representative from your plan’s administrator. If you have online access to your retirement account, check for a contact number; you may also check with your employer’s Human Resources department to see what type of advice might be available to you.
Whether you’re not too excited about to possibility of navigating a customer service menu over the phone, speaking to your Human Resources contact is inconvenient, or you just want to educate yourself before having those conversations, here is a post to help you out.
Note that this post is not intended as advice, but rather is my own process for evaluating what to do with my 401k money. Hopefully, it is of some help to you, as well, as you come up with your own plan.
First we’ll look at a couple of the tools of the trade, the prospectus and fund fact sheet. From there, we’ll look at some common offerings in most 401k plans. Let’s get started.
Tools of the Trade: Prospectus and Fact Sheet
Some of you may wince a little at the sight of the word “prospectus”, but hear me out.
While I think you should look over the prospectus, I tend to lean on the fact sheet a little more when it comes to picking funds for the account.
Both documents have a lot of the same information.
The prospectus goes into a lot more detail in terms of the expenses you pay to have your money invested in a particular fund and some of the different types of risk involved with investing in that fund. It’s a good idea to look over the prospectus even if you may not be too familiar with all of the terms. (I tend to find the breakdown of fund expenses to be quite interesting.)
The fact sheet is probably going to be easier for most people to read. So, the fact sheet tends to be easier to use when comparing Fund A to Fund B, in my opinion.
Picking My Funds: Target-Date Funds (TDFs)
In the interest of full disclosure, I am not a big fan of target-date funds. While there are some advantages to TDFs, they’re just not right for me, today.
That said, you’re not wrong if you decide to go with a target-date fund in your retirement accounts.
And, since this blog is about helping YOU find what works for YOU, let’s look at how I would pick a target-date fund in a retirement account if I wanted to do so. I’ll get into specifics about my hang-ups on TDFs, later.
In my opinion, the best thing about target-date funds is the simplicity in picking them out. And, this is where our beloved Fund Fact Sheet comes into play. Let’s look at what is referred to as a “glide path”.

The image above shows how a target-date fund might invest in stocks (Equity) and bonds (Fixed Income) both as you approach retirement and as you progress through retirement. This one looks like you start at almost 100% stocks while your working, hit about 60% stocks and 40% bonds at your estimated retirement date, and progress to about a 30-70 split when you’re well into retirement (about 30 years after).
To pick your fund, all you need to do is take an educated guess about when you want to retire.
Let’s say you want to retire around the year 2038. You would likely start out by choosing a 2040 target-date fund. To get more aggressive, move out to the 2045 or 2050 funds. If you’re a little more risk-averse, maybe 2035; TDFs are said to already be a little conservative, so I wouldn’t take my risk aversion any further than a few years, though.
As for my main reservation with TDFs, that lies with the fact that a target-date fund is a mutual fund that invests in other mutual funds. Another at our fact sheet reveals that our TDF has a Trustee Fee of 0.43%, in this case.

What this fact sheet doesn’t tell me is if that 0.43% includes money paid to the underlying mutual funds that the TDF invests in. Trying to access a prospectus for these funds returns a “not yet available” message on my plan administrator’s website. And, a quick search for the actual fund’s prospectus online would seem to indicate that the fact sheet’s 0.43% figure excludes the fees of the “acquired funds.” The actual fees might run from 0.7-1.0%; not super expensive, but not cheap in comparison to other options that I have.
As I get closer to retirement, I may decide that the extra expense is worth it to not have to do the analysis we’ll cover in the next section; aging has a way of doing things to your mind. Until then, my preference is going to be to pick out my own mutual funds.
Speaking of…
Picking My Funds: Mutual Funds
As an alternative to selecting a target-date fund, I like to pick out my own mutual funds. Even if you’re leaning toward a target-date fund for your retirement account, I think it would be helpful to go through the process of picking out individual funds at least once. Going through this exercise will lead you to one of two conclusions.
- Picking out your own funds isn’t so bad, and you wouldn’t mind doing this every 5 years or so.
- Picking out your own funds is a terrible process, you never want to do it again, and you want to give the inventor of target-date funds a great big hug.
Let’s Get Started
It’s time to break out our Fund Fact Sheets! We’ll be looking primarily at historical returns (how much money the fund has made), top holdings in the fund (which stocks and bonds are in the fund), turnover ratio (how often holdings get bought and sold), and the expense ratio (how much the fund is going to cost you). We’ll also want to make sure we’re invested in a good blend of US stocks, International stocks, and bonds.
What Choice(s) Do I Have?
In my 401k, I have a choice between 14 different mutual funds, broken down by the following types of investments: (The type of investment can be found in the plan’s prospectus, the fund fact sheet, and your plan administrator probably has a nice and simple listing on its website.)
- US Stocks – 8 funds
- International – 2 funds
- Bonds – 2 funds
- Balanced (mix of stocks and bonds) – 1 fund
- Cash – 1 fund
What Do I NOT Want?
The cash option, usually labeled as “stable principal” or “money market”, is a glorified savings account. Most people, I would think, are better off ditching these funds. The only exception that comes to mind is if you are very close (within a year) to retirement and your other savings accounts are a little on the weak side; in that case, maybe a low single-digit allocation to one of these cash funds would work.
Next up is the balanced funds. I eliminate this one because my only option is 70% stocks and 30% bonds, which is a less aggressive investing style than I want at this point. Also, if you want to have bonds in your portfolio, it’s easier to just pick a bond fund for your account.
If you’re under the age of 40, consider whether or not you want any bonds in the account. If not, you may want to eliminate the bond funds. I’m 47, so I want some of my money in bonds.
On to the Picking
Now that I’ve eliminated some funds that I know that I don’t want to consider, let’s look at what’s left.
- 8 US Stock Funds
- 2 Global/International Funds
- 2 Bond Funds
I have 12 funds left, and the stereotype is that most people just look at the highest long-term returns, pick the top 3 or 4, and move on. That strategy, however, risks concentrating your investment dollars in the same individual companies. To make sure we spread our money around, we’re going to add one step before we look at how much money a fund has made in the past, and a few simple checks afterwards if we’re still having trouble deciding.
When we’re done, we’ll have 3-5 funds selected for our retirement account.
US Stocks:
When selecting US Stocks, I like to separate them further to make my comparisons easier. The break-down goes like this:
- Large Cap – companies with market values (or market capitalization) of $10 billion or more (as 2020)* ; look for the following terms
- Large Cap
- Big Cap
- Institutional
- Mid Cap – companies with market values from $2-10 billion.*
- Small Cap – companies with market values from $300 million to $2 billion.*
- Other – probably a fund that is specific to a particular sector, such as technology or industrials. My 401k has one of these; it is a technology fund. (Save this for your last comparison if you have one of these funds to choose from.)
- Total Market – I don’t have this option, but if you see it, it’s worth considering. It’s a fund that is pretty much the entire US stock market. If decide you like this option, you can move on to international and bond funds…simple. (Maybe, add that tech fund if you like it.)
*Source is here; definitions may vary depending on the fund.
From here, I start with the 3 large cap funds I have to choose from. If your funds aren’t that easy to separate into the above categories, just pick the first 3 to start out.
Separating my fund options by market cap makes sure that we’re not over-investing in a few companies, but you may still want to look for a list of the top holdings. This list is usually near the section on the fact sheet that shows the historical returns. Look for something like this…

Once we have confirmed that we’re looking at similar funds, we can move on to looking at historical returns.

Look at the historical performance of the similar funds. I focus most on the 10 year returns, but notice that I also look a little at the 3 and 5-year values. The “Since Inception” returns are useful as an FYI, but you may not be able to use that as a direct comparison because the different funds probably have different inception dates. (You don’t want to compare a 12-year period to a 15-year period.)
What if the performance numbers between the 2 funds are similar? Look for the expense ratio.

If the 2 funds you are comparing have similar rates of return (what constitutes “similar” is up to each investor), choose the lowest expense ratio. That means you are paying less to fund managers for investing in that particular fund.
If the expense ratio doesn’t sort things out, you have 2 choices.
The first choice is to head over to your prospectus and find the turnover ratio. Turnover ratio is a measure of how often investments are bought and sold out of a fund. Lower is better.
The second choice is to assign one of your funds as “heads” and the other as “tails”. Flip a coin; ditch the loser.
Continue this process for all US Stock funds until you’re down to 2-4. Then repeat the exercise for international stocks. (Look for terms like international, emerging markets, or EuroPacific if your plan doesn’t categorize the funds for you.) And, finally, repeat the process for bond funds (sometimes also referred to as fixed income), if you want some bond exposure. I wouldn’t choose more than 5 funds total.
We’re almost done
When you’re done with your comparisons, your choices should be down to something like this:
- 2-4 US Stock funds
- 1 International fund
- 1 bond fund (optional for you younger folks)
Decide how much you want in the bond fund. My personal preference (yours may vary a little; you can be more or less aggressive as you choose.) is:
Under 40: | 0% |
Age 40-45 | 5-10% |
Age 45-50 | 10-15% |
Age 50-55 | 15-20% |
Age 55-60* | 20-35% |
Age 60-70+* | 30-50% |
Once you’ve decided on bond allocation, spread the money fairly evenly across your remaining selections.
My allocations as of today are:
Large Cap US Stocks | 30% |
Small-Mid Cap US Stocks | 30% |
International Stocks | 25% |
Bonds** | 15% |
Last, but not least, look for the rebalancing option. You definitely want to do this; it moves money around at set periods of time to keep your money invested in the allocations you have just selected above. Think of it as another layer of buy low/sell high in your accounts. Choose to do this once every 6 or 12 months; either of those choices is fine.
If you can’t find the rebalancing option, check with your employer’s human resources or call/chat with your plan’s administrator for assistance.
Once you’ve selected the rebalancing option, finish pushing any buttons you need to push, go on with life living, and don’t look it this stuff for, at least, another 5 years.
There are a lot of ways to evaluate the many funds included in retirement accounts. Hopefully, my process has helped you either select your own funds, or find a method you can call your own.
Thank you for visiting Finunciate. Come back soon.
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