Understanding Your 401(k): Investment Options, Fees, and Key Documents

Your 401(k) could become one of your largest financial assets. Understanding how it is invested and what you pay in fees can help you make better decisions about your retirement savings.

If you participate in your employer’s 401(k) plan, here’s where to start.

Start With Your Annual Fee and Investment Disclosure

Start by reviewing your plan’s annual participant fee and investment disclosure, sometimes called the annual disclosure statement.

For most participant-directed 401(k) plans, this disclosure provides information about the available investment options, their historical performance, relevant benchmarks, and fees.

For funds without a fixed rate of return, it generally includes one-, five-, and ten-year returns, or performance since inception if the fund has a shorter history. It also explains plan administrative fees and certain charges for individual services.

This document gives you a starting point for comparing your choices.

Choose an Investment Strategy

Before selecting individual funds, consider your retirement timeline, your comfort with market fluctuations, and your overall financial situation.

Then look for investment options that fit your strategy at a reasonable cost. Compare funds with similar objectives, and evaluate their performance over several periods rather than focusing only on the most recent year.

Past performance does not guarantee future results, and higher fees do not necessarily mean better performance.

Think of your 401(k) investment menu like a supermarket: you want quality and value. But the right choice also needs to fit your needs.

Your plan may offer several types of investments, each with different risks.

Money Market Funds

Money market funds are generally among the lowest-volatility options in a 401(k) plan.

They invest in short-term debt instruments, which may include government securities and high-quality corporate debt. Many seek to maintain a share price of $1.

However, money market funds are not FDIC-insured, and maintaining that $1 share price is not guaranteed. Their income also changes with short-term interest rates.

They can help preserve short-term stability, but keeping too much of your retirement savings in cash may limit long-term growth.

U.S. Government Bond Funds

Funds that invest in U.S. Treasury securities generally have very low credit risk, but their value can still fluctuate.

When interest rates rise, the prices of existing fixed-rate bonds generally fall. When interest rates fall, those bond prices generally rise. Longer-term bonds tend to be more sensitive to interest-rate changes.

The government’s backing of Treasury securities does not guarantee the share price of a fund that holds them. A Treasury bond fund can lose value.

Stock Funds

Stock funds invest in shares of companies and offer potential for long-term growth, along with greater short-term volatility.

Your plan may offer funds that invest in large U.S. companies, smaller U.S. companies, international developed markets, or emerging markets.

Smaller-company and emerging-market funds can carry additional risks, but there is no universal ranking that applies to every fund. A fund’s risk depends on its holdings, diversification, and investment strategy.

Also, distinguish a diversified stock fund from your employer’s company stock. Holding a large amount of one company’s stock concentrates your investment risk, especially when that company also provides your paycheck.

Target-Date Funds

Target-date funds offer a way to hold a diversified investment portfolio in a single fund.

Each fund has a year in its name, such as 2035, 2045, or 2065, generally corresponding to an investor’s expected retirement year.

Funds with more distant target dates typically hold more stocks. As the target date approaches, they generally shift toward a more conservative mix, with a larger allocation to bonds. This planned change is called a glide path.

However, funds with the same target year can have different investment mixes, fees, and glide paths. Some continue adjusting their allocations after the target date. They can still lose money, and reaching the target year does not guarantee sufficient retirement income.

Before choosing one, review its current allocation and how that allocation will change over time.

Use Your Plan’s Website

Your employer or plan provider should give you instructions for accessing your retirement account online.

The website typically lets you review your balance, contributions, investment choices, performance, and fees. Depending on the plan, you may also be able to change your contribution rate or investment allocation.

Look for these key documents:

• Annual Fee and Investment Disclosure

Use this document to compare the plan’s investment options, historical returns, benchmarks, and expenses.

• Account Statement

Your account statement shows your balance, the investments you own, contributions, transactions, and applicable account charges.

Review it regularly to confirm that your contributions and investment selections match your intentions.

• Fund Fact Sheet

A fund fact sheet provides a quick overview of an investment option. It typically describes the fund’s objective, strategy, major holdings, performance, expenses, and risk characteristics.

Use it to understand what you are buying and how it fits into your portfolio.

• Prospectus or Other Investment Disclosure

For mutual funds, a summary prospectus explains the fund’s objectives, principal risks, fees, performance, and management.

Some 401(k) options, such as collective investment trusts, use other disclosure documents instead of mutual fund prospectuses. Review the materials available for each investment.

• Summary Plan Description

The Summary Plan Description explains how your plan works, including eligibility, employer contributions, vesting, and distribution rules. It also identifies whom to contact with questions.

Understanding both the plan’s rules and its investments will help you make more informed decisions about your 401(k).