401(k) Investment Options
Because a 401(k) is a defined contribution plan, you (or your employer) decide the amount deposited every month and where to invest your funds.
But what if you've never invested before? How will you know where those funds should go? The answer depends entirely on you and your retirement goals. What is best for you is between you and your financial advisor. A professional money manager can evaluate your needs in order to help you decide where to comfortably invest your hard-earned money.
The most common investment option for a 401(k) plan is mutual funds. A mutual fund is a group that brings together the money of multiple investors to make different kinds of investments.
Mutual funds generally come in three varieties: stocks, bonds and money markets. Below our basic definitions of these types of funds:
Stock Mutual Funds
When you invest in stock mutual funds, your investments are used to purchase stocks. Stocks are ownership in a publically traded company. A third-party professional, referred to as a money manager, purchases stocks. Because you own a small piece of the company, you will gain or lose money on the investment depending upon on how well the business does. This translates to the amount in your 401(k) growing or shrinking depending on if the business whose stocks you have purchased performs.
Bond Mutual Funds
Bond mutual funds work the same way as stock mutual funds, except that the money manager invests in bonds. Bonds are essentially reverse loans. With a regular loan, such as an auto loan, you borrow money from a bank and pay it back with interest. With a bond, a business borrows money from you and pays it back with interest, often at a fixed rate. That interest determines how much of a profit your 401(k) gains when the bond is repaid.
Money Market Accounts
A money market account is more closely related to a savings account than other mutual funds. Money market accounts are savings accounts insured by the Federal Deposit Insurance Corporation (FDIC). Money market accounts pay higher interest, have higher balance requirements, and have different restrictions on withdrawals.
Depending on the company hosting your 401(k), you may have all of these options and more presented as possible investment options. Learn as much as you can about each option, and be sure to ask your professional money manager to help you determine the best options for your future.
Resources
American Association of Retired Persons (www.aarp.org)
The AARP provides information on financial retirement planning, 401(k), investment and options.
Internal Revenue Service (www.irs.gov)
An in-depth explanation of the 401(k) contained in the IRS Retirement Plans Community.
The Motley Fool (www.fool.com)
A well-known and respected online investment community, The Motley Fool walks you through your 401(k) step by step, engaging all the details without the complex language of many investment resources.
