Overwhelmed by too many 401(k) options?

@Money October 25, 2011: 11:36 AM ET

NEW YORK (Money) -- I contribute to my company 401(k) plan. Problem is, the investment choices are overwhelming. Where should I put my money? -- Blake, Opelousas, La.

With 401(k)s featuring an average of nearly 20 different investment choices these days -- ranging from basic stock and bond funds to "alternative" investments like commodities and hedge fund-like options -- it's hard not to feel overwhelmed.

Maybe one day companies will take the time to read Columbia University professor Sheena Iyengar's research showing that too many choices can be so confusing that people may make no decision at all.

But before you give up -- or make like you're at a smorgasbord and help yourself to a bit of everything on the menu -- I suggest you check out the 401(k) investing strategies below, which I've labeled by their acronyms: DIY, TDF and MA.

They're all relatively simple, and any one of them can work. It's just a question of picking the one that appeals most to you, and that you're most likely to stick with over the long run.

1. D.I.Y.: The do-it-yourself approach to creating an effective 401(k) portfolio can work just fine provided you've got a basic understanding of how investments work -- or you're willing to gain that knowledge by reading our MONEY 101 lessons on investing, mutual funds and asset allocation.

The key is starting with an overall plan -- that is, deciding on the appropriate asset allocation, or blend of stock and bond funds that makes sense given your age and stomach for risk.

The younger you are, the more you'll want to focus on stocks. Yes, they're more volatile than bonds and can suffer periods of lousy returns. But over the long run -- by which I mean decades -- stocks have and are expected to generate the loftiest gains. Your plan may offer tools that can help you assess which stock-bond mix might be right for you. If not, go to Morningstar's Asset Allocator tool.

Once you've got a suitable blend, you can move on to picking specific investments. Don't try to get too fancy. If your plan has index funds -- especially ones that track the entire stock and bond markets -- I recommend opting for them. You'll get broad diversification, plus low fees.

For mutual funds and ETFs that I and my colleagues at MONEY consider worthwhile, take a look at our MONEY 70 list of recommended funds. Your 401(k) may not offer these exact funds, but you can look for ones on your roster that have similar characteristics.

2. TDF: Target-date funds are an excellent choice if you don't have the time, inclination or expertise to arrive at an asset allocation strategy on your own and carry it out with specific funds.

Offered by almost two-thirds of 401(k) plans, target-date funds operate on a simple premise: You choose a fund with a target date that corresponds to when you plan to retire -- 2020, 2040, whenever -- and the fund gives you a diversified mix of stocks and bonds that's suitable for your age. What's more, that blend automatically becomes more conservative -- as the fund shifts assets from stocks to bonds -- as you get older. It's sort of like putting your retirement investing on autopilot.

Worried about your investments? Send the Help Desk your questions.

But as convenient as this approach is, you don't want to take too much of a hands-off policy. Not all target-date funds offer the same mix of stocks and bonds for investors of a given age, nor do they all follow the same "glide path," or the process of gradually moving from stocks to bonds.

So as I explained in an earlier column, before you invest make sure the fund's stock-bonds allocation isn't too racy or too wimpy for you. And be especially sure to ascertain what the fund's mix will be as you near and enter retirement, since it's during that crucial phase of turning assets into income that some target funds invest more aggressively than others.

3. MA: No, I'm not talking about a Master of Arts, but a managed account. With this option, you essentially turn over your 401(k) account to an investment firm like Financial Engines, Morningstar or GuidedChoice. The advisory firm then builds a portfolio from the investments in your plan and then manages it on an ongoing basis.

According to a recent survey by benefits consulting firm Aon Hewitt, a little more than a third of companies make managed accounts available in their 401(k) plan, and another 30% are considering adding them.

The cost varies from plan to plan, but generally you should expect to pay 0.30% to 0.75% of assets per year. That's in addition to the underlying expenses charged by the funds within your plan that make up your portfolio.

Are retirement calculators reliable?

The question with this option is whether you're getting anything more than a glorified target-date fund. There's no easy answer to that question. But one advantage to the managed account approach is that the investment firm may also be able to provide investment advice about assets you and/or your spouse have in IRAs or other retirement accounts, or at least take those assets into account when creating your 401(k) portfolio.

So I suggest that you evaluate the three options I've outlined, and pick the one that best jibes with your financial abilities and willingness to take an active hand in your retirement investing. But do it now. Because the longer you delay, the lower the chances you'll reach retirement age with a nest egg adequate for your needs.  To top of page

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