Here are the best fund selections for 401(k) accounts.
S&P 500 Index Fund
The S&P 500 Index Fund is a low-cost index fund that invests in large-cap company stocks. This fund is considered one of the foundational funds that can be used to build an investment portfolio. The index consists of 500 of the largest publicly traded companies in the U.S. The index is periodically adjusted to align with the value of the underlying stock market.
Foreign Equity Fund
Foreign equity funds invest in companies based on the fund’s focus on specific investment targets. These funds can be global or regional in their investment portfolio distribution. Although these funds typically offer higher returns, they come at a cost that exposes investors to greater risks, including currency exchange rate risks.
Small-Cap Equity Fund
Small-cap equity funds contain listed companies with market capitalizations ranging from $300 million to $2 billion. These funds offer extreme growth but come with more volatility. If you want to provide or invest in an extreme equity fund, the small-cap equity fund is a good option that can complement the S&P 500 index fund.
Comprehensive Bond Market Fund
Comprehensive bond market funds are mutual funds or exchange-traded funds that hold bonds across a wide range of maturities. These funds typically contain corporate bonds but may also include municipal bonds, high-quality mortgage-backed securities, and treasury bonds.
Money Market Funds
Cash can be a part of a diversified portfolio. There will be times when cash returns to the 401(k) plan. A money market fund provides an ideal place to hold this cash.
Target Date Retirement Funds
Target date retirement funds have become a staple of 401(k) plans. As the name suggests, these funds allow investors to select a target date close to their desired retirement date. The employee allocates eighty percent of their funds in the 401(k) account to the target date retirement fund.
Worst Funds for 401(k) Plans
Sometimes the best choice is to avoid bad choices. As a fiduciary, employers should avoid putting money into a 401(k) plan that could experience significant price declines over a short period. Also, if you are an employee and your 401(k) plan includes some of these options, you should proceed with caution and ensure you review the option before selecting it as part of your investment plan.
Emerging Market Risks
Emerging market funds are the riskiest foreign equities and invest in companies located in emerging countries. These countries are those transitioning to global markets and economies. While these funds are more stable than frontier market funds, they are less stable than developed market funds.
Individual Risks
Sector funds pool all investments into one sector of the overall market. Due to the narrow focus of these investments, they are more susceptible to individual risks referred to as “specific risks.” While sector funds can be wisely utilized in a diversified portfolio, they are not always good choices for 401(k) plans.
Default and Credit Risks
High-yield bond funds carry the risks of low investment-grade bonds or debt from companies and other entities. This category of mutual funds is similar to other types of high-risk funds. The underlying debt of the companies held by the funds can expose investors to default and credit risks. Companies with low creditworthiness can go bankrupt and may default on their debts.
Conclusion
The goal for both employers and employees is to do well in diversifying assets to provide retirement savings. Remember that the returns of a particular investment fund are less important than its diversification characteristics.
Do not
The Balance offers tax, investment, financial services, or advice. The information provided does not take into account the investment objectives, risk tolerance, or financial circumstances of any specific investor and may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risks, including the risk of loss of principal.
Source: https://www.thebalancemoney.com/best-funds-for-401-k-plans-2466343
Leave a Reply