The 5 Most Common 401(k) Investments

The 5 Most Common 401(k) Investments

A 401(k) is one of the best ways to save for retirement. If you’re a business owner, offering a 401(k) plan helps your employees build their future and shows you care. But it’s not just about offering a plan. It’s about offering the right 401(k) investment options.

Let’s break down the five most common types of 401(k) investment options in a way that’s easy to understand, even if you’re not a finance pro.

1. Index Funds: Go With the Flow

The term “fund” can be applied to most if not all of the investment options you include in your 401(k) plan—that’s why it’s referred to as a “fund lineup.” Think of index funds like a mirror. They reflect how a big group of stocks—like the S&P 500—is doing. Instead of trying to “beat the market,” index funds follow it. Typically structured as mutual funds or ETFs (exchange-traded funds), they’re low-cost, easy to manage, and a smart way for employees to grow their savings over time without needing to be stock-picking experts.

Why it Matters

Index funds offer a simple, cost-effective foundation for long-term growth. While they don’t require constant attention, it’s still important for employees to periodically review their 401(k) investments to ensure alignment with their goals and risk tolerance.

2. Target-Date Funds: Set It and Forget It

Target-date funds are designed to simplify retirement investing. Employees select a fund based on the year they expect to retire—say, 2055—and the fund automatically adjusts its mix of investments over time. Early on, it focuses more on stocks to pursue growth. As the target date approaches, it gradually shifts toward more conservative investments like bonds to help reduce risk.

Why it Matters

Target-date funds offer a structured, hands-off approach to managing risk over time. While they adjust automatically, it’s still important for employees to periodically review their 401(k) investments to ensure the fund aligns with their personal retirement goals.

3. Bond Funds: Steady and Reliable

Bonds are like IOUs. When someone buys a bond, they’re lending money to a company or the government, and they get paid back with interest. Bond funds group lots of these together. They don’t grow as fast as stocks, but they’re more stable, especially during market ups and downs.

Why it Matters

Bond funds help balance risk and provide steady growth, especially for employees nearing retirement.

4. Stock Funds: Growth Over Time

Stocks are pieces of ownership in companies. When a company does well, its stock usually goes up, and so does the value of the investment. Stock funds are collections of many different stocks, which help reduce risk.

Why it Matters

Stocks offer the potential for strong long-term growth, making them a key part of most retirement portfolios. While they can be volatile in the short term, staying invested through market ups and downs has historically rewarded investors. Diversifying across different types of stock funds—such as large cap, small cap, and international—can help manage risk while capturing growth opportunities.

5. Cash or Stable Value Funds: Safe and Simple

Some employees may choose to keep a portion of their 401(k) in cash-like investments, such as money market funds or stable value funds. These options are low-risk and offer easy access to funds, which can be helpful for those nearing retirement or needing short-term stability. However, they typically offer limited growth potential compared to other investment options.

Why it Matters

While cash and stable value funds can play a role in managing short-term risk, staying invested in a diversified portfolio is essential for long-term retirement growth. These options are best used as part of a broader strategy—not as a long-term parking place for retirement savings.

The Bottom Line: Give Your Team the Right Tools

A strong 401(k) plan isn’t just about offering one or two investment options. It’s about giving your employees a diverse mix so they can build a retirement strategy that fits their age, goals, and comfort with risk.

By including index funds, target date funds, bond funds, stock funds, and cash options, you’re helping your team make smart choices—without needing a finance degree.

Let’s Talk

We’re here to help you and your employees navigate the complexities of 401(k) plans and saving for retirement. Contact us to talk about what your business needs.