When it comes to 401(k) fund options, more can be less in terms of your ability to make good investment choices.
Certainly, employers have been generous in the number of options they offer in 401(k)s. According to a recent survey, “in 2020, the average large 401(k) plan offered 28 investment options, of which about 13 were equity (stock) funds, three were bond funds, and nine were target-date funds.”
The research, published by Brightscope and ICI, broke down the choices into several investment varieties:
- Mutual funds held 40 percent of large private-sector 401(k) plan assets in the sample in 2020.
- Collective investment trusts (CITs) held 38 percent of assets.
- Guaranteed investment contracts (GICs) held 6 percent,
- Separate accounts held 3 percent, and the remaining 12 percent were invested in individual stocks (including company stock), individual bonds, brokerage, and other investments.
- Index funds make up a significant component of 401(k) assets, holding 41 percent of 401(k) assets in 2020. Index funds are widely available across all plan sizes.
- More than 95 percent of 401(k) plans with more than $10 million in plan assets offered index funds in their plan lineups in 2020, while 86 percent of 401(k) plans with less than $1 million did.
Are more options better or worse for 401(k) savers? If they trigger choice anxiety or poor decisions, more is not better.
I know if you’re looking at your 401(k), it’s like standing in front of a buffet. What do you consume? It’s a tough choice that leads to bad decisions. I would focus on three objectives:
- Look carefully at expense ratios. The lowest-cost index funds will allow you to save the most amount of money over time.
- Diversify Broadly. You should have index funds that invest across the world. If your employer offers “global” stock and bond index funds, those are easy choices. As Vanguard founder Jack Bogle used to say, “why choose separate funds when you can own the whole basket?”
- How long will it be before you retire? Those closer to retirement should incur lower overall risk — in every market. You may consider target-date funds, which lower risk the older you get, but keep and eye on expenses. Some can be overly expensive.
Whatever you do, seek qualified advice on what’s best for your and your situation. I would suggest hiring a fee-only fiduciary certified financial planner if you can’t get customized advice through your employer.
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