The Best 401(k) Investment Options

A 401k plan can be a winning investment, and over the long term a savvy investor can build an impressive nest egg for retirement. The downside is that a 401k plan shifts the burden of investing from the company to the average worker, and it can be hard for the employee to make sense of the many options offered by the plan.

The stable value fund is not a true investment, but it is a good place to stash cash while evaluating your choices and looking for the right investment. The stable value fund can also be a good choice for workers who are getting ready to retire, since moving some money into this safe haven preserves capital and provides ready cash flow. A stable value fund is similar to a money market in that it provides a safe place to keep your cash. But the low yields of these funds make them unsuitable for long-term 401k investing.

Index funds are among the lowest cost of all 401k options, making them a good choice for many investors. The track record of index funds has been quite impressive over the long run, with the vast majority of managed funds unable to beat their performance. Many 401k plans now offer a stock market index fund, and the cost of these funds can be less than a third of what the typical managed fund charges.

If you prefer to take a hands-off approach to your 401k, you might want to choose a target date retirement fund. Many companies now make target date funds the default choice for their new workers, since these funds automatically rebalance themselves as employees get closer to retirement. With a target date fund, you simply choose the one that best approximates your planned departure from work. The fund manager then adjusts the mixture of stocks, bonds and fixed-income investments, taking more and more stock market money off the table as retirement gets closer and closer.

A balanced fund can be a good choice for those workers who are transitioning into retirement or considering investing within the next few years. A balanced fund typically invests half of its assets in the stock market and the other half in bonds and other fixed-income securities. This balanced mix of stocks and bonds can be very valuable during the transition to retirement and beyond. The stock market exposure in the fund can help retirees stay ahead of inflation, while the bond market and fixed-income portion can provide current cash flow to supplement other sources of retirement income.