How I Pick My 401k Funds in Just 15 Minutes

How I Choose My 401k Investments in Just 15 Minutes

A few weeks back, I talked about why we should invest. Today I want to talk about company-sponsored retirement plans, which is how most people dip their toes into investing. Specifically, how I’d go about choosing the investment funds that go into them.

Investing in your first 401k (or 403b/457 for nonprofit and government folks) can be overwhelming. Everyone tells you you need to do it, but no one tells you how to actually do it. Maybe you’ve read all about “asset allocation” and how “index funds” are the bee’s knees. Doing research is a great first step, but for many of us, things are different when you actually have to apply information in a real-life situation. Because once you log into your 401k account for the first time to set it up, you’re met with alphabet soup like this:

401k Options Are Overwhelming

With often dozens of 401k fund options to choose from, how do you know which ones to pick? And if you can’t interpret all the gobbledygook in the chart, how do you know which numbers to pay attention to, and which are just a smoke screen?

You’re in the right place.

Once upon a time, I was in the same boat as you. I was super excited to participate in my first 401k. Calculating how much I could contribute to it was easy. But then I had to figure out which investments to choose. Armed with something called a “prospectus,” a PDF that detailed every single option available to me, I spent hours Googling every single one to try to figure out which one would make me the most money.

But I don’t waste my time vetting every single option anymore. I now look for specific features, and I narrow down my choices through process of elimination. All in all it takes about 15 minutes.

Today I’ll walk you through that process, using a real-life example of actual funds we can vet. I’m not going to explain every single term, because I honestly don’t think you need to know them all to do an alright job. At least, I didn’t.

So, let’s 80/20 this.

Disclaimer: I’m not a financial professional. This post details which factors I would personally take into account when choosing my own investment options. Do your own research before making investment choices.

*Some affiliate links below*

1. Avoid Money Market Funds

Ninety-nine percent of the time I’d encourage you to act like my mom. This is the one time I’d advise you not to.

My heart sank when I found out my mom had been investing 100% of her 401k money in a money market fund for years. That’s right–she was invested in zero stocks. Someone equally clueless from work must have checked off that box for her. Money market funds are the most conservative investment fund option, and is like cash investments in terms of returns. It’s painful to think about how that money could have grown.

If you’re investing in a 401k, you’re planning for retirement, which I’m guessing is decades from now. You have time to recover if the market goes down, so you can withstand more risk.

The one marked as ‘Short Term’ in the Asset Class column? I would ignore it, or at least not invest a significant portion of my money in it.

Avoid Money Market Funds

2. Take Fees into Consideration

Here’s a golden rule of investing: past performance does not guarantee future performance.

You can’t control how well your investments will do, but you can control how much you pay to invest. Yes, it costs money to invest. You pay annual fees, an “expense ratio,” based on the percentage of the assets. This is why I ignore stats like past performance and ratings, and only pay attention to the Expense Ratio column (in the green below).

Vetting 401k Options by Expense Ratio

Looking at the chart, paying a fee like 0.84% seems like nothing, and the most expensive option in the example, 1.02%, sounds totally reasonable. But fees can make a drastic difference in your returns.

When comparing expense ratios, also be sure to note the decimal points. At a quick glance, 0.7% and 0.07% can easily look the same.

Let’s compare how those fees can play out over time. If you started with $10,000, and invested $5,000 each year for 30 years with a 6% return, here’s how much each will cost you.

Expense Ratio Comparison
Chart: Begin to Invest

A 0.63% difference can end up costing you almost $50,000 more over a span of 30 years. To me, anything over 1% is expensive. Generally, my benchmark for funds are ones that cost less than 0.5%, but it all depends on what options you have in your 401k plan. If many of them are expensive, then you may have a crappy 401k plan.

Besides expense ratios, there are other fees you can incur, like load fees and redemption fees, but they aren’t in this specific example. Anyway, I avoid those, too.

Calculating fees can get cumbersome, so all my investment accounts are hooked up to Personal Capital, which has a nifty retirement fee analyzer tool. Below you can see how much I’m paying each year per fund.

Retirement Fee Analyzer - Personal Capital

And below is another screenshot from my Personal Capital account, where you can see how my annual fees compare to the benchmark, and how much I’d lose to fees over a longer period of time.

How to Check Investment Fees Over Time

3. Choose Index Funds

Ignoring options with high fees now leaves us with about 7 funds out of the initial 30. There are four in particular that I like, highlighted in green. These are called index funds. Funds are either “passively managed” or “actively managed.” Index funds are passively managed and not only cost much less, but fairly consistently outperform actively managed funds.

How can you tell which one is an index fund? They’ll typically have really cheap fees, less than 0.1%, and the fund names have the word ‘index’ in them.

How to Identify Index Funds

Looking at the Asset Class and Category columns, we now have three different types of stocks funds and one bond fund left:

  • Stocks:
    • Large Blends
    • Mid-Cap Blend
    • Foreign Large Blend
  • Bonds

4. Figure Out Your Risk Level

Now you have to allocate percentages to the funds you pick. You can pick just one fund, or a mix, as long as everything adds up to 100%. How you divvy up your portfolio is an important part of your strategy, and depends on your risk level.

To illustrate, the chart below shows you typical returns based on different allocations. On the very far left is the most conservative, at 100% in short-term investments (what my mom did). You’re not going to get really sexy returns with a conservative portfolio. And on the far right is the most aggressive portfolio, with most of it in domestic stocks and some in foreign stocks. Having 100% of your portfolio in stocks gives you the biggest chance for growth…but you might not be able to stomach the stock market swings.

Click to Enlarge

The Importance of Diversification
Chart: Fidelity

Going back to our four options, and matching the categories to the chart, we have two domestic stock indexes, one foreign stock index, and one bond index to mix and match. Note: I use charts as guidelines, not for exact proportions for how to put together my own portfolio.

  • Stocks:
    • Large Blends = DARK BLUE
    • Mid-Cap Blend = DARK BLUE
    • Foreign Large Blend = LIGHT BLUE
  • Bonds = GREEN

A common recommendation is to make sure your portfolio has both stocks and bonds. There are plenty of quizzes that can help you figure out how to allocate your portfolio, like this CNN one, although I find most of them to be too conservative.

Since I have several decades until I’m touching the money, I go for aggressive growth. And because I value simplicity, I would only pick a few funds. And this is what I would choose:

  • 90% large blend domestic stocks – Vanguard Institutional Index I (VINIX)
  • 10% bonds – Vanguard Total Bond Market Index Fund (VBMFX)

Most people would add in some foreign stocks, too, but I’d rather use a different investment account for that. For my 401k, I like to keep it pretty simple, since the options are limited.

Choosing your own risk allocation can be intimidating. As I mentioned there are quizzes like the CNN one I linked above, or you can connect your investment accounts to Personal Capital and it can recommend allocations for you, like below.

Investment Checkup - Personal Capital


By focusing on a few key concepts, investing doesn’t have to be nearly as complicated as it seems. And if you can figure it out for your 401k, then you can figure it out for investment accounts you open on your own, too. To recap, some factors to consider:

  • Avoid expensive fees
  • Consider index funds, if you have them as options
  • Understand your risk level

I hope this post was helpful! And if you’re interested in trying the Personal Capital app I mentioned for free, you can sign up here, and we’ll both get a $20 bonus. Win-win.

There’s no right or wrong way to invest, so I’m interested to hear about different approaches. What factors do you consider when picking your 401k investments?

Image: Unsplash

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