Understanding Your 401k Investment Options

There are many investment options available in most 401k accounts. Investment options can range between six to eight options, but can also be significantly more numerous.  Many accounts allow you to choose, or allocate, portion of your available funds into the various alternative plans. The value of your investment has a direct relationship with the options that you choose.  It is imperative that you educate yourself about the options; evaluate both the risks and rewards associated with each option.  Each option can offer a host of benefits that you can avail of in your later years.

Here are 401(k) investment options that you can choose from:  

Stable Value Funds

As indicated in the name, these funds tend to be stable investment vehicles.  Consistent and predictable income is expected. These are also called “Fixed Fund” or “Guaranteed Fund” because the income is predictable.  These funds are offered by insurance companies, under a contract, and may be called “Guaranteed Interest Contract” or “GICs.” This option is guaranteed by the issuing company, and because of the low risk involved, the return is also low.  Should the return be significantly low, the return may be nullified by the cost of inflation. It is important to check the financial health of the insurance company underwriting the contract. This can readily be checked from firms such as Moody’s, A.M. Best or Standard & Poor’s, who issue these ratings.

Company Stock

Stock is an ownership instrument, and buying “ownership” into any company exposes you to risks associated with business. Generally, your 401k stocks bonds portfolio should have a small portion of company stock, and that includes your own employers also. It is a good idea to research the company you are investing in fully.  Find the ratings, research future endeavors and consider their published financial records.

Mutual Funds

Mutual Funds collect money from a host of investors and invest the money into a "basket" of securities.  A basket can include stocks, bonds and money market instruments. By spreading out the funds, risk is reduced.  Risk is never eliminated completely with mutual funds. You may consider investing in more than one mutual fund to further reduce your risk.  The following are special types of mutual funds investment tools that may be available in your 401(k):  

  • Money market mutual funds assets usually consist of US Treasury Bills, Certificates of Deposits (CDs) and other commercial instruments. Because of their high security, the returns are low, and often lag behind inflation.
  • Bond mutual funds typically invests in government bonds, or those offered by corporations, or a combination of both.
  • Stock mutual funds are monies invested in publicly traded stock in the market, and this 401k asset allocation is a viable investment strategy.

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