The variety of investments available in your 401(k) will depend on who your plan provider is and the choices your plan sponsor makes. Getting to know the different types of investments will help you create a portfolio that best suits your long-term financial needs. Among the most important—and perhaps intimidating—decisions you must make when you participate in a 401(k) plan is how to invest the money you're contributing to your account. The investment portfolio you choose determines the rate at which your account has the potential to grow, and the income that you'll be able to withdraw after you retire. 401(k) Fact Most 401(k) plans provide at least three investment choices in your 401(k) plan, but some plans offer dozens. The average plan offers between 8 and 12 alternatives, sometimes only mutual funds and sometimes a combination of mutual funds, guaranteed investment contracts (GICs) or stable value funds, company stock and variable annuities. Some plans offer brokerage accounts, which means you can select investments from the full range of stocks, bonds, mutual funds, and other types of assets, rather than having to choose among the plan’s alternatives. Every 401(k) plan lets you decide how to invest the contributions you make. Some plans also let you decide how to invest your employer’s matching contributions, but others let the employer make that choice. That includes the right to provide the match in company stock. If you have a limited number of choices—say two stock mutual funds, a bond fund, a stable value fund and a money market fund—each is likely to put your money to work quite differently from the others. The more choices you have, the more difficult it may be to choose the ones best suited to your investment goals and risk tolerance. It’s your responsibility to find out how the choices differ from each other and what each of them could contribute to your portfolio. When you’re automatically enrolled in a 401(k) plan, your employer chooses a default investment for your contributions. The default investment will likely be a lifecycle fund, a balanced fund or a managed account, which the federal government has approved as acceptable choices. You have the option of sticking with the default investment, or moving your money into different investments offered by the plan. Types of 401(k) InvestmentsThe most common type of investment choice offered by a 401(k) plan is the mutual fund. Mutual funds can offer built-in diversification and professional management, and can be designed to meet a wide variety of investment objectives. Be mindful that investing in a mutual fund involves certain risks, including the possibility that you may lose money. Your 401(k) plan may offer other types of investments. Some of the more common ones include:
Building PortfoliosChoosing the right combination of investments is essential to setting your 401(k) portfolio on the right track. But before you begin evaluating your choices, you’ll want to consider several factors:
1Roger Young, “You’re Age 35, 50, or 60: How Much Should You Have Saved for Retirement by Now?,” T. Rowe Price, May 2022. Investment Risks: Target date funds: The principal value of target date funds is not guaranteed at any time, including at or after the target date, which is the approximate year an investor plans to retire. These funds typically invest in a broad range of underlying mutual funds that include stocks, bonds, and short‑term investments and are subject to the risks of different areas of the market. In addition, the objectives of target date funds typically change over time to become more conservative. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Treasury Inflation Protected Securities: In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities. Growth stocks are subject to the volatility inherent in common stock investing, and their share price may fluctuate more than that of a income-oriented stocks. Small-cap stocks have generally been more volatile in price than the large-cap stocks. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. Important Information This material is provided for general and educational purposes only and is not intended to provide legal, tax, or investment advice. This material does not provide recommendations concerning investments, investment strategies, or account types; it is not individualized to the needs of any specific investor and not intended to suggest any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. Please consider your own circumstances before making an investment decision. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates. This information is not intended to reflect a current or past recommendation concerning investments, investment strategies, or account types, advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Please consider your own circumstances before making an investment decision. Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy. Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only. View investment professional background on FINRA's BrokerCheck. 202209-2435931 |