401(k) Fundamentals

Making investment decisions
Employees are responsible for their 401(k) investment decisions. Most plans have an array of mutual funds to choose from, but too often there is little guidance as to proper asset allocation and the role fees and expenses play in overall returns.

Before you can decide how to allocate your contributions, you have to determine your risk tolerance. How much volatility within your portfolio can you stand?

If you're in your 20s or early 30s, you can afford to be more aggressive with your investments because you have more time to recover from slumps in the stock market. As you age, your asset allocation should shift to more conservative investments to protect the earnings.

Many 401(k) plans offer tools (online calculators, work sheets) for determining risk tolerance. Since January 2007, the Pension Protection Act of 2006 has allowed "fiduciary advisers" to help employees make 401(k) decisions. The thinking is that by providing employees access to professional advice, more workers will choose to participate in the plans.

If you already have a personal financial planner, discuss how your 401(k) fits into your overall retirement planning strategy. It you don't, it might be worth hiring a planner to listen to your financial goals and evaluate your assets and earning ability to help you craft an allocation plan that will ensure a comfortable retirement.

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