How Should I Invest My 401(k)?

Your 401(k) might be your biggest retirement asset, but if you don’t know how it’s invested, you could be missing out or taking on too much risk. From target date funds to DIY portfolios and managed accounts, this guide explains the main 401(k) investment options and how to choose the one that aligns with your goals, risk tolerance, and timeline.

A 2023 SurveyMonkey study revealed a surprising fact: nearly half of 401(k) investors don’t know what investments they actually own in their account. In fact, 46% admitted they had no idea which funds their money was in.

That matters, because if you don’t know what’s in your 401(k), you can’t know if your investments are the right ones for your goals.

If you’ve ever wondered, “How should I invest my 401(k)?”, you’re not alone. The good news is that most retirement plans are designed to make the decision easier, offering a handful of structured paths. In this article, we’ll break down the most common 401(k) investment choices, highlight the pros and cons of each, and share guidelines to help you feel more confident about your plan.

Why Your 401(k) Matters So Much

For many Americans, a 401(k) is the single largest retirement savings vehicle. While IRAs, pensions, and taxable accounts may also play a role, your workplace retirement plan often carries the heaviest weight in your future income.

That’s why understanding how to invest inside your 401(k) is so important. Contributing the right amount is step one — but what you invest in determines how fast your money grows and how well it supports you in retirement.

The Three Main 401(k) Investment Paths

When you log into your 401(k) portal (through providers like Fidelity, Vanguard, Empower, or others), you’ll usually see three core investment approaches:

1. “Do It for Me” – The default option, often a target date fund or managed account service.
2. “Do It Myself” – Choosing your own funds and building a custom portfolio.
3. “Help Me Do It” – Guided tools, questionnaires, or professional management (usually for an added fee).

Some plans also offer a fourth, less common choice: a self-directed brokerage account (like a Charles Schwab’s PCRA), which lets you invest in almost anything outside the plan’s standard menu. Let’s unpack each one.

Option 1: Target Date Funds (The “Do It for Me” Route)

Target date funds are one of the most common investment options offered in retirement plans. They’re professionally managed, diversified funds designed to automatically adjust over time.

How They Work

• One-stop-shop: A single fund holds a mix of stocks, bonds, and sometimes other investments.
• Glide path: When you’re younger, the fund invests more heavily in stocks for growth. As you approach retirement, it shifts gradually into bonds and other conservative investments to reduce risk.
• Labeled by year: Each fund is tied to a “target year,” often your expected retirement age (e.g., 2040, 2050).

Why They’re Popular

According to Vanguard, target date funds are the default option (QDIA) in 98% of workplace retirement plans. That’s because they’re simple, easy to understand, and suitable for a wide range of investors.

Pros

• Simple, diversified, and automatic.
• Requires little to no monitoring.
• Adjusts allocation over time without you needing to rebalance.

Cons

• One-size-fits-most approach. May not fit your exact risk tolerance.
• Fees vary — some target date funds are very inexpensive, others cost more.
• Less effective once you’re close to retirement, when personalization matters more.

Quick Tip

If you feel the default allocation is too aggressive or too conservative, you can adjust by picking a target date fund with a later or earlier year than your actual retirement age. For example, if you’re planning to retire around 2040 but want more growth, you could pick the 2045 or 2050 fund.

Option 2: Building Your Own Portfolio (The “Do It Myself” Route)

For those who want more control, you can select individual funds from your 401(k)’s menu.

Typical Options Include

• S. stock funds: Large-cap, mid-cap, and small-cap funds.
• International funds: Exposure to markets outside the U.S.
• Bond funds: Ranging from government bonds to corporate bonds.
• Stable value or money market funds: Low-risk, low-return options.

Key Considerations

1. Diversification: U.S. companies make up about 65% of the world’s market capitalization. That means a globally diversified portfolio might include 65% U.S. funds and 35% international funds — though your mix will depend on your risk tolerance.
2. Bond “Traps”: Many 401(k) menus offer only a few bond funds, often index-based. Be especially cautious of “high yield bond funds” — these are essentially junk bonds, which can behave more like stocks during downturns.
3. Rebalancing: Unlike a target date fund, you’ll need to revisit your allocations regularly (annually or semi-annually) to make sure your stock-to-bond ratio still fits your goals.
4. Fees: Compare expense ratios for each fund. Over decades, even a 0.25% fee difference can cost tens of thousands of dollars.

Pros

• Greater control and flexibility.
• Ability to customize based on your exact goals.
• Can often build a lower-cost portfolio if you choose wisely.

Cons

• Requires knowledge, monitoring, and discipline.
• Easy to misjudge allocations or take on more risk than you realize.
• Limited fund options compared to IRAs or brokerage accounts.

Option 3: Managed Account Services (The “Help Me Do It” Route)

Some plans offer professional management for an additional fee (often 0.50% annually).

What You Get

Typically, you fill out a risk questionnaire, and the provider chooses and rebalances your investments for you.

Important Caveat

In many cases, you’re paying extra for a service that doesn’t provide personal financial planning — just fund selection. You may never even speak to a licensed advisor.

When It Makes Sense

• If your account balance is large (e.g., $500k+), and you’d rather have someone else manage it.
• If you’re nearing retirement and want some additional structure, but your plan doesn’t offer other options.

Pros

• Hands-off management.
• Professional oversight.

Cons

• Higher fees than a target date fund, sometimes without much extra value.
• Limited personalization compared to working with a dedicated advisor.

Option 4: Self-Directed Brokerage Account

A handful of 401(k) plans allow a “brokerage window” (sometimes called a PCRA — Personal Choice Retirement Account). This option lets you go beyond the plan menu and invest in nearly anything available in a standard brokerage account.

Pros

• Maximum flexibility.
• Access to a wide universe of ETFs, stocks, and funds.

Cons

• Requires advanced investing knowledge.
• Easy to get overwhelmed or make costly mistakes.
• May carry additional fees.

This is best suited for experienced investors or those working closely with an advisor.

Practical Guidelines for 401(k) Investing

No matter which route you choose, keep these principles in mind:

1. Contribute enough first: Even the best investments won’t help if you’re not contributing enough to your 401(k). At minimum, capture your employer match.
2. Diversify: Don’t put all your eggs in one basket. Spread across U.S. and international stocks, and include bonds as you near retirement.
3. Keep an eye on fees: Lower fees mean more money compounding for you.
4. Rebalance periodically: If you’re managing your own funds, check your allocations annually.
5. Get personalized advice when needed: As you get within 5–10 years of retirement, customization matters more. Your allocation should reflect not just your 401(k), but your total financial picture (other accounts, spouse’s plan, Social Security, etc.).

The Bottom Line

Your 401(k) is too important to leave on autopilot. Whether you stick with a simple target date fund, build your own portfolio, or seek professional guidance, the key is to understand your options and make intentional choices.

For younger investors, a target date fund can provide a worry-free, diversified solution. For those nearing retirement, a more customized plan often makes sense.

The right strategy for you depends on your age, risk tolerance, other assets, and retirement goals — but one thing is certain: the more informed you are, the stronger your retirement future will be.

Want more help? Let’s chat.