Investment Options of 401K Plans

A 401K retirement savings plan is typically established and invested by employers on be half of employees who wish to save part of their salary for retirement later. Under this plan, employees will make salary deferral (also known as salary deduction) contributions to the investment portfolio on deferring current income taxes on the saving amount and earning until withdrawal.  Employees can also add a profit sharing feature to the plan to make investment on annual earnings. This retirement savings plan is only available in the United States of America.  

As part of diversified investment nature and better risk management, most 401K plans are invested in a broad range of investment options.  It really depends on the size of the company and savvy of the financial management investment options are either extended to more options or less.  It is important for you to understand these investment options and how they impact your returns hence making better investment decisions.  401K Plans allow you to divide your savings and place in different investment portfolios which offer different returns for medium and long terms needs as well as balancing risks.   

The followings are some common investment options:

1. Fixed funds or Guaranteed Funds: an investment option that offers steady, predictable growth of your savings.  The funds are typically underwritten by insurance companies therefore it poses low risk an of course low interest rates.  When you offset your earnings with inflation you typically earn small growth out of your investment.
2. Mutual funds: an investment option designed to minimize risks.  A typical 401K plan may include a few mutual funds that consist of an assortment of stocks, bonds and other financial instruments, in which you can invest.  Mutual funds typically offer you a series of investment categories as following:
   1. Bond funds: investment made in government loans; which poses medium risk and sensitive to interest rate volatility.
   2. Balance funds: investment in an assortment of stocks and bonds portfolio to minimize the risks of stocks while maximizing the benefits of bonds’ stability.
   3. Money market funds: investment made in short term savings options such as Treasury bills, CDs; which poses low risk and low return also.
   4. Stock Index funds: investment made in a portfolio of an assortment of listed companies’ stocks.  This type of investment generally has reasonable return and considered risk balanced.
   5. Growth funds: investment made in a portfolio of high potential companies but not yet prove to be high profitable companies through dividend payouts.    
   6. Growth and Income funds: investment made in companies with established track record of dividends payouts and has potential to grow faster.  This type of investment is considered risk balanced.
3. Stocks:  Keep in mind that 401K Plans are not insured by either the government or your employer therefore wherever they are invested there maybe some level of uncertainties associated with.  Some may be tempted by a certain company’s performance but it is always more risky for one to invest in one single company.  If you decide to pick stocks by yourself, do so with advices from a specialist who may give guidance on how to diversify your portfolio to shield risks. If you want to learn more you may read financial magazines, funds prospectus to have in depth understanding of investment goals and techniques before making your decisions.