How To Analyze 401(k) Fund Offerings

If you just opened your 401(k) or are investigating where you should be invested, my advice to you is to keep things as simple as possible. If it’s your first 401(k), or your first time looking at it with this company, it can be a little overwhelming to figure out what you should be doing. If it’s not your first 401(k), you might be worried that your investments aren’t adequately diversified versus your other investments or that you simply haven’t picked the best ones for your financial situation. Regardless of your motivation to analyze your 401(k) fund offerings, the task is still the same and can seem monumental… so let’s keep things simple.

The two things you need to figure out are cost and performance. There are a lot of options, more if your company uses a traditional brokerage to manage the 401(k) because it opens up the full range of Wall Street’s products, but sticking with mutual funds can’t be wrong. Forget active versus passive or ETFs or individual stocks, stick with mutual funds, if you want a low maintenance 401(k), and you’ll be saner for it.

So, with cost you’ll want to see whether you’re getting a good bang for your buck. Passive funds generally have low expense ratios and likely low sales expenses (active funds usually have much higher because there is more activity) and trend with the market. If you’re happy with that, as many are, an index fund is always a good option. If you want the potential for greater gains, you can look at an actively managed fund. Past performance isn’t an indicator of future performance, but what else are you going to base your decision on if not the past? 🙂

Lastly, remember to use tools to see if your diversification is in line. Are you in too much stock? Not enough bonds? Too much international and not enough domestic? Or you could just go with a target retirement or life-cycle mutual fund, they can take care of those details for you (if you trust them!).