You don't have to master investing to allocate money in your 401(k) account in a way that meets your long-term goals. Here are three low-effort 401(k) allocation approaches and two additional strategies that might work if the first three options aren't available or right for you.
Basics of 401(k) Allocation
When you allocate your 401(k), you can decide where the money you contribute to the account will go by directing it into investments of your choice.
At a minimum, consider investments for your 401(k) that contain the mix of assets you want to hold in your portfolio (stocks and bonds, for example) in the percentages that meet your retirement goals and suit your tolerance for risk.
Easy 401(k) Allocation Approaches
There are many 401(k) allocation approaches you can take to achieve your investing aims without much effort, some more hands-off than others.
Use Target Date Funds To Retire on Your Terms
A target-date fund is a fund geared toward people who plan to retire at a certain time—the term "target date" means your targeted retirement year. These funds help you maintain diversification in your portfolio by spreading your 401(k) money across multiple asset classes, including large-company stocks, small-company stocks, emerging-markets stocks, real estate stocks, and bonds.
You’ll know your 401(k) provider offers a target-date fund if you see a calendar year in the name of the fund, such as T. Rowe Price's Retirement 2030 Fund.
Target date funds make long-term investing easy. Decide the approximate year you expect to retire, then pick the fund with the date closest to your target retirement date. For example, if you plan to retire at about age 60, and that will be around the year 2030, pick a target-date fund with the year "2030" in its name. Once you pick your target-date fund, it runs on auto-pilot, so there is nothing else you need to do but keep contributing to your 401(k).
The fund automatically chooses how much of which asset class you own. Over time, the fund rebalances itself—money automatically gets moved between asset classes in a way that supports your goal to retire by the target date. The diversification and automatic rebalancing mean that a target-date fund can be the only fund in your 401(k) account. As you near the target date, the fund will progressively become more conservative, and you will own less stock and more bonds. The goal of this 401(k) allocation approach is to reduce the risk you take as you near the date when you need to begin withdrawing from your 401(k) money.
Use Balanced Funds for a Middle-of-the-Road Allocation Approach
A balanced fund allocates your 401(k) contributions across both stocks and bonds, usually in a proportion of about 60% stocks and 40% bonds. The fund is said to be "balanced" because the more conservative bonds minimize the risk of the stocks. This means that when the stock market is quickly rising, a balanced fund usually will not rise as quickly as a fund with a higher portion of stock. When the stock market is falling, expect that a balanced fund will not fall as far as funds with a higher portion of bonds.
If you don’t know when you might retire, and you want a solid approach that is not too conservative and not too aggressive, choosing a fund with “balanced” in its name is a good choice (Vanguard Balanced Index Fund Admiral Shares, for example). This type of fund, like a target-date fund, does the work for you. You can put your entire 401(k) plan in a balanced fund, as it automatically maintains diversification and rebalances your money over time to maintain the original stock-bond mix).
Use Model Portfolios to Allocate Your 401(k) Like the Pros
Many 401(k) providers offer model portfolios that are based on a mathematically constructed asset allocation approach. The portfolios have names with terms like conservative, moderate, or aggressive growth in them. These portfolios are crafted by skilled investment advisors so that each model portfolio has the right mix of assets for its stated level of risk.
Risk is measured by the amount the portfolio might drop in a single year during an economic downturn.
Most self-directed investors who aren't using one of the above two best 401(k) allocation approaches or working with a financial advisor will be better served by putting their 401(k) money in a model portfolio than trying to pick from available 401(k) investments on a hunch. Allocating your 401(k) money in a model portfolio tends to result in a more balanced portfolio and a more disciplined approach than most people can accomplish on their own.
Spread 401(k) Money Equally Across Available Options
Most 401(k) plans offer some version of the choices described above. If they don’t, a fourth way to allocate your 401(k) money is to spread it out equally across all available choices. This will often result in a well-balanced portfolio. For example, if your 401(k) offers 10 choices, put 10% of your money in each.
Or, pick one fund from each category, such as one fund from the large-cap category, one from the small-cap category, one from international stock, one from bonds, and one that is a money market or stable value fund. In this scenario, you’d put 20% of your 401(k) money in each fund.
This method works if there are a limited set of options, but requires much more time and research there are an array of options. In addition, it's not as fail-safe as the first three because the asset mix may not be suitable for your retirement goals, and you have to rebalance the portfolio to maintain a certain percentage of each asset category over time.
When possible, it is always recommended that you complete an online risk questionnaire or consult a knowledgeable investment professional before haphazardly choosing stock investments that may lose you money.
Work With an Advisor for a Tailored Allocation Strategy
In addition to the above options, you can opt to have a financial advisor recommend a portfolio that is tailored to your needs. The advisor may or may not recommend any of the above 401(k) allocation strategies. If they pick an alternate approach, they will usually attempt to pick funds for you in a way that coordinates with your goals, risk tolerance, and your current investments in other accounts.
If you are married and you each have investments in different accounts, an advisor can be of great help in coordinating your choices across your household. But the outcome won't necessarily be better—and your nest egg won't necessarily be bigger—than what you can achieve through the first four 401(k) allocation approaches.
Frequently Asked Questions (FAQs)
How much should I contribute to my 401(k)?
The general rule of thumb is to aim to invest 15% of your gross income into your 401(k), including your employer match. But the exact target for you depends on your life stage, investing goals, and the aggressiveness of your portfolio. You also may want to combine a 401(k) with other retirement investment accounts such as a Roth 401(k) for tax strategy. Talk to an advisor to discuss the right investment plan for you.
What is a good rate of return on a 401(k)?
How you define a good rate of return depends on your investment goals. Average 401(k) returns typically range between 5% and 10% depending on market conditions and risk profile. If you're playing catch-up, you may want higher returns. If you have a long way until retirement and a low tolerance for risk, you might be comfortable with a lower return.
How can I protect my 401(k) from a stock market crash?
Although, there is no way to perfectly protect your investments from a financial downturn, there are solid strategies you can take to hedge against a major crash. These include keeping a diverse portfolio, not panicking when dips happen in the market, and consistently funding your 401(k) over time.
The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a financial professional to determine a suitable retirement savings, tax and investment strategy.