The Best 401(k) Allocation Approaches for Low-Effort Investing

Learn how to pick investments for your 401(k) the easy way

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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 decide where the money you contribute to the account will go by directing it into investments of your choice.

At a minimum, you should pick 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.

1. 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.

2. 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 overtime to maintain the original stock-bond mix).

3. 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 such as Conservative, Moderate, or Aggressive Growth. 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.

4. 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.

5. Work with an Advisor for a Tailored 401(k) 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 three 401(k) allocation approaches.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.