Evaluating new fund options in a 401(k) plan


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Spending your days lounging on sun-drenched white sands to a soundtrack of crashing ocean waves doesn’t have to be only a retirement pipe dream, but it does take some diligent planning to make it a reality.

The first step? A comprehensive 401(k) plan.

You should audit your 401(k) plan throughout your career, but make an effort to be especially proactive when your employer switches up their plan offerings. It’s easy to get lost in the fine print, so take time to evaluate all your fund options and seek out what works best for you.

If your employer is offering a revitalized 401(k) plan this year, here are some things you should consider to make sure your funds put you on your best path towards retirement.

Assess your risk tolerance and level of involvement

Do you like to track your 401(k) and monitor it along with your other investments or would you rather take a backseat after you’ve made your initial allocations?

Most people choose to simplify the process as much as possible and let their contributions accumulate automatically. In this case a target-date fund or lifecycle fund is probably the best match.

A target-date fund allows you to choose an expected retirement date from the beginning and then adjusts from riskier but potentially higher-earning investments to more conservative options as you approach that date. With a lifecycle fund, on the other hand, you’ll pick a strategy at the onset that simply maintains for the lifetime of the fund.

If you want to take a more hands-on approach, you can select actively managed mutual funds. Keep in mind, however, passive index funds typically outperform actively managed funds over time.

Before you forgo simpler options for actively managed funds, do your research and take time to evaluate your specific goals. Think about your risk tolerance and allocate your funds accordingly. Diversify further by integrating a global aspect in with your U.S. stocks and bonds.

Most importantly, make sure you’re confident not only in your knowledge of the markets but also in your tolerance for market corrections.

“The No. 1 factor for people to have returns is to not get scared or panic when the stock market goes down,” Audrey Morrison, president of Cairn Financial Advisors says. “The behavior piece of it is the most important part.”

In fact, the less reactive you are, the better. “You can keep an eye on it, but I wouldn’t go in and adjust it more than twice a year,” she continues. “You don’t want to get into that habit of reacting.”

Performance matters

A well-performing fund is every investor’s primary goal, but it’s also the one that’s most difficult to predict.

You can’t look into the future to see which fund will deliver the highest returns, but you should look at each option’s past performance over time. Morrison recommends looking at least five years back to evaluate a fund’s performance.

“I would also look at the fund manager to make sure the manager’s not turning over a lot,” she says. “And how well the person who’s managing the fund is regarded.”

Fees matter even more

Fees are an important consideration over the lifetime of your 401(k), and reducing your fees could be reason enough to inspire taking on a new fund option.

“The best is to have low fees, regardless,” Morrison says. Even with higher returns, an expensive fund can end up costing you more in the long run than a more cost-effective fund with slightly lower returns.

Bankrate’s mutual fund fees calculator can help you evaluate the impact fees will have on your investments.


You shouldn’t take on new options simply for the sake of doing so. Make sure any new funds you add will diversify your overall plan and improve your portfolio.

This is where you may need to dig in and conduct your own research. Comb the information you’re given and look to outside sources to make sure the investment holdings you want to take on are distinct enough from your current funds that you’re not just going to pay further fees for a similar option.

You can use sites like Morningstar to compare potential new funds with your current holdings based on several criteria to ensure you’re properly diversifying with any new options you take on.

Use your resources

Often, when your employer changes 401(k) plans, a representative will set aside time to go over each offering and provide insight into any differences and features of the new options.

This is the perfect opportunity to clear up questions about how you can improve your funds under the new plan as well as any changes you should expect in your employer’s match and vesting.

But there are also plenty of online resources that can help you decide.

Morrison recommends taking advantage of your new plan provider’s website or app. Their tools can give you more information on your specific plan and allocations. “If you answer a couple questions about how close you are to retirement and how much risk you like to take, they’ll ask you specific questions about how much you can deal with loss and that sort of thing and it’ll give you an allocation,” she says.

When in doubt, you can always present your options to a certified financial planner or other adviser who can help you ensure you’re taking on the best funds for your overall plan.

Look at the big picture

This is also a good time to make sure you’re caught up on the other aspects of your employer’s plan.

Are you contributing enough to meet their match? Are you increasing contributions each time you earn a salary increase? Are you working towards contributing 15 percent of your salary or even maxing out contributions each year? If you’re over age 50, are you taking advantage of catch-up contributions?

Familiarity with the overall state of your retirement savings can help you narrow down fund options if you’re still on the fence and put you on a clear path to retirement success.