Traditional 401(k) Allocation Options
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If you’re eligible to save in your employer’s 401(k) plan, you might have questions about your allocation options. While 401(k)s are significantly simpler than an entirely self-directed brokerage account, they can still be intimidating for retirement savers who are unfamiliar with the variety of fund options available.
Average Fund Allocation Options
Most 401(k)s will likely offer about a dozen different buckets of fund types. These usually include:
U.S. Large Cap
U.S. Medium Cap
U.S. Small Cap
International Stocks
Real Estate
U.S. Bonds
International Bonds
Cash
Under each of those allocation umbrellas you should have a handful of options. For example, under large cap you probably have an S&P 500 Fund, Growth Index Funds and “social” funds for investors who want to invest their retirement savings into companies with specific environmental, social or governance (ESG) agendas.
Medium cap fund options will also include “mid cap” growth, index and value fund options, while small cap funds will have similar fund options specifically for small cap companies.
International and emerging market allocations will have similar types of index and value fund options specifically invested in international businesses.
If your 401(k) has real estate investment options, they likely take the form of REITs (real estate investment trusts).
U.S. bond funds (and potentially international bond funds) are essentially baskets of bonds. These may be either U.S. treasury bonds or a variety of corporate bonds. If your 401(k) provider has ESG large cap stock funds, they likely also have similar ESG bond funds.
You may also have access to specific “inflation-protected” bond funds, which may be appealing to some soon-to-be retirees and retirement savers concerned about inflation.
Lastly, your 401(k) may also give you access to FDIC-insured deposit accounts or money market accounts, which is essentially just a store of U.S. dollars.
Common Terminology
Large Cap, Mid Cap and Small Cap
Market capitalization is calculated by multiplying the outstanding shares of a company by the last closing price of the stock. Large cap, sometimes referred to as big cap, are funds that hold stock of companies with a market capitalization over $10 billion. Mid cap funds hold stock of companies with market capitalizations between $2 billion and $10 billion. Small cap are funds that hold stock of companies with $300 million to $2 billion market capitalizations.
Conservative Funds
Conservative funds are generally heavily invested in bonds, money market funds and other stable-value funds. These funds are geared toward maintaining their value rather than growth. Your allocation may be heavily weighted toward conservative funds if you’re nearing retirement, or you’re particularly concerned about market uncertainty and volatility.
Value Funds
Value funds are investment options that hold shares of companies that the fund managers consider to be undervalued. The undervaluation determinations are often based on the fund manager’s own proprietary algorithms and formulas, but the conclusions tend to be derived from market fundamentals, publicly available metrics and business characteristics.
Balanced Funds
Balanced funds are those that contain a mix of stocks and bonds designed to balance growth and risk. They often maintain a roughly 70/30 stock to bond split.
Aggressive Growth Funds
These funds specifically hold stocks of companies that the fund managers deem to have significant growth potential. While these funds offer high potential upside, they are also fairly risky compared to more conservative or balance-oriented funds.
Specialized Funds
Specialized funds are usually industry-specific funds. It’s often a way for investors to put their dollars into specific sectors, like energy, real estate, financial services or telecom.
Target-Date Funds
These curated funds allow retirees to choose a specific target date for their retirement (or when they want to begin withdrawing money). The allocations are then automatically adjusted over the years to (ideally) maximize your 401(k) valuation on that date.
How to Manage Your 401(k) Plan
Although every person has their own risk tolerance preferences and should invest in a way that feels comfortable for them, there are a handful of housekeeping matters every 401(k) investor should attend to annually.
You should look at your 401(k) at least once a year and adjust or rebalance your allocations as necessary. For example, an investor may start their 401(k) in January with allocations set to 30 percent conservative, 30 percent aggressive growth and 40 percent balanced. In December, the actual value of their funds might look something like 20 percent conservative, 50 percent aggressive and 30 percent balanced. The investor may want to rebalance their allocations back to where they were originally.
Market changes might also justify adjusting your allocations. Maybe domestic markets are slowing down while foreign markets are growing at a more rapid rate. In that scenario, the investor may want to reduce domestic allocations and place a percentage of their retirement savings into international funds.
While dwelling on your 401(k) allocations and checking it every week is likely excessive, checking performance and allocations at least once a year can ensure your retirement savings reflect your goals.
Get Help with Your Retirement Savings
Do you have questions about your retirement savings? The retirement planning professionals at Fullerton Financial Planning are here to help. Contact our investment managers in Phoenix by calling (623) 974-0300.