The 60 Minute 401(k) All you need is an hour--that's right, just one hour--to create a solid retirement strategy and pick the right funds from your employer's plan. Don't believe us? Read on. The clock is ticking.
By Laura Lallos

(MONEY Magazine) – For our first anniversary here at MONEY, staffers receive a fat envelope stuffed with information on our 401(k). I'm looking forward to my big day in March. But, to be honest, this benefit can seem like a burden too: It will be up to me--not my company--to sort through all those papers and pamphlets and devise the strategy on which my future happiness will hinge.

It seems that many of us don't want such responsibility. A recent survey for Mutual of Omaha shows that nearly half of 401(k) participants can't name a single investment option in their company plan, and 75% spend less than 10 hours a year evaluating and tracking their investments.

Yes, we all should have more than a passing acquaintance with the funds in our plans. Even 10 hours a year doesn't seem all that onerous, considering that our retirement savings are usually our most significant assets. Still, not all of us want to put in that much time. Fortunately, we don't need to. If you have just an hour or so, you can cut through the clutter and create a solid, sophisticated portfolio. This story will show you how. Of course, the more you put in, the more you'll get out of it; if you can, linger on those steps that will help you make the most of your employer's plan--whether a 401(k), 403(b) or 457--and check out our "Overtime" tips. But our 60-minute basics are the bedrock. (In fact, they provide important lessons for choosing investments outside a retirement plan as well.)

Perhaps you've already devised a strategy for your retirement plan. We'd encourage you to put in an extra 60 minutes now anyway. For one thing, runaway tech-stock prices the past few years may have tilted your balanced portfolio too far toward today's riskier names. For another, many employers have added more investment options the past few years--our 401(k) at MONEY's parent, Time Warner, for instance, recently went from 10 choices to more than 100. If you haven't been paying attention, you may be missing out on the best stuff.

We'll be using my Time Warner 401(k) as a guidepost throughout this story. The 103 options the plan now offers are a nice plus--but that's a lot of information to slog through. I could thoroughly investigate each one, relying on my experience covering mutual funds at MONEY (and for seven years before that at Morningstar) to peek into every portfolio corner and poke at every angle. Then again maybe I'd rather plan my upcoming hiking trip in New England. The point of my 401(k), after all, is not necessarily to wring every last ounce of return out of the market. (How could I, when the evidence shows that most professional money managers can't beat the market over the long term?) It is to help me retire when I'm still spry enough to trek the Himalayas.

My goal here is simple: to come up with a plan with a good chance of getting me the retirement I want. It's not a test to see if I can pick the five future top performers from my 401(k) lineup. Like me, the investors profiled in these pages aren't driven by dreams of vast riches. They just want the freedom to have some fun. (We hooked them up with financial planners and computerized retirement-advice services to see what they've been doing right and wrong and to help them develop new strategies to get them where they want to be.)

The process I used to get from 103 funds to five is outlined below, in nine distinct steps. It's a program that anyone can follow. So gather up that pile of paper--or better yet, log on to your plan's website if there is one--and let's get started.


We've said it before, we'll say it again: Take a few seconds to make sure you're contributing as much as your plan allows. Truth is, the amount you stash away now is far more important than your choice of large-cap stock funds. "Savings have a huge impact," says Jason Scott of online 401(k) adviser Financial Engines. "Investors can make the biggest impact on their retirement portfolio by deciding to retire later and save longer, although that's not a palatable option for most people. But the next biggest thing they can do is to save more, sooner."

Consider Scott Noel, a young Ford Motor employee who didn't seem likely to meet his ambitious retirement goals no matter which mutual funds he picked. But Noel hadn't realized that his company's plan allowed him to stockpile more than the 10% that he had been saving. At MONEY's request, Financial Engines factored in those extra savings going forward and offered a game plan that should help Noel stand a better chance. (See his story on page 92.)

If you recently switched jobs and were automatically enrolled in your new plan--common practice these days--don't assume that you're contributing the maximum allowed; you likely were signed on for only 3% or so. Or maybe you felt you couldn't afford to save the maximum when you signed up several years ago; if you've gotten raises since then, raise your contribution rate too.

At the very least, invest enough to receive the full employer match. Saving less is like turning down free money.


Go grocery shopping without a list, and you're liable to go home with two flavors of Godiva ice cream, a jar of raspberry mustard and no milk or cereal. (Well, I'm liable to.) So don't browse among all those fascinating funds without a clear idea of what you need. If you reach for the flashiest returns, you may end up with three tech-heavy funds and not one sensibly diversified large-cap stock fund, a staple of a well-balanced portfolio.

My plan package has an easy-to-use asset-allocation worksheet from our plan provider, Fidelity. I enter such basic information as my desired retirement date, the size of my emergency fund for immediate needs until then and my ability to stomach losses. In less than a minute, I calculate that I'm an aggressive growth investor who should have 85% of my 401(k) money in stocks and 15% in bonds.

Fidelity's Web tools (available to all at yield a more detailed breakdown after a similar probe: 50% large-cap stocks, 20% midcap and small-cap, 15% international stocks, 10% investment-grade bonds and 5% high-yield bonds.

There are other online tools, which provide similar results, at some of the sites listed in the resources box on page 96. Or consider one of Fidelity's sample allocations on page 91. Adopting several different personas, I went through the online questionnaire a few more times and got quick-and-easy breakdowns for growth, balanced and conservative portfolios. (No need to follow these rough guidelines down to the percentage point, of course.)


Now it's time to look over your specific investment options. First move: Toss aside the choices that don't match up with your asset allocation. I throw out my plan's money-market and capital-preservation funds because I don't need cash dampening an aggressive portfolio. I also reject the 14 hybrid offerings that combine stocks and bonds. I prefer funds that stick to one or the other because that makes it easier to calibrate and control my overall asset allocation.

(Of course, you might consider making the exact opposite choice. For true investing couch potatoes, a so-called life-cycle fund may be the best way to go because it offers easy one-stop shopping with almost no fieldwork and minimal maintenance. See "The Six-Minute Portfolio" below.)

Despite my suggested bond allocation, I also summarily exclude all 18 bond funds. My Time Warner benefits package includes pension and profit-sharing components, but one limitation is that I'm allowed to contribute only 6% of my total pay to my 401(k). At Morningstar, I'd grown accustomed to pouring 15% into my plan, and I'm determined to try to keep the pace going forward, even if I can't do it all with pretax dollars in a qualified retirement plan. I quickly decide to make the most of the 401(k) tax deferral by socking all 6% into stock funds. After all, it's easy to shelter bond income from taxes in investments made outside my 401(k): I can buy tax-exempt municipal bond funds. (For other strategies to boost your overall retirement savings, see "How to Compensate for a Crummy 401(k)" on page 93.)

I've now pared down my list from 103 choices to 69. Not bad for a few minutes' work. But I still have slicing to do.


My employer match will come in the form of company stock, so I won't invest in the Time Warner Stock Fund with my own money--I could soon end up with a portfolio that teeters riskily toward a single stock. I'm now down to 68.

I scan the list for other obvious outliers I can easily chop. Does Fidelity Convertible Securities perform like a bond fund or more like a stock? Who knows? It's out. Does Fidelity Export and Multinational count toward international? I can't answer that question within my 60 minutes. For the same reason, I won't bother finding out whether Fidelity Utilities invests in traditional dividend-paying electric companies or fast-growing telecom stocks. And I don't need funds that target specific foreign countries or regions when I can get diversified exposure in a one-stop international fund. Simply by running down the list, I've cut another eight names. But I've still got 60 left.


You know the boilerplate: "Past performance does not guarantee future results." But there is a way to determine which funds are likeliest to outperform: Look at expense ratios. As Vanguard's Jack Bogle put it in our recent Ultimate Investment Club interview (October), "I've never seen a case where the lowest-cost quartile of funds in a group did not outperform the highest-cost quartile in the long run." The argument is confirmed by the research of academics like Burton Malkiel, author of A Random Walk Down Wall Street.

My plan packet didn't contain expense ratios, but Fidelity's website did. (Charles Schwab, which administers my old 401(k), was more helpful here: Its website shows each fund's expenses next to a category average.) If you still have a pile of funds to sift through but you do not have a quick-and-easy way to get expense figures via a website or in your plan documents, you could save this step until further down the line, perhaps as a way to choose among several similar options.

I run through my list of funds to eliminate those with above-average annual expenses, using these benchmarks:

--Bond funds: 0.85% --Domestic stock funds: 1.19% --Small-cap stock funds: 1.37% --International stock funds: 1.56%

If these expense figures are lower than other averages you may have seen, it's because they exclude the highest-cost types of shares (such as B and C classes). A good 401(k) plan these days is a Price Club of fund investing--your company buys in bulk and gets a discount. Since any decent 401(k) offers funds with cheaper shares, why pay expenses higher than these?

To me, the only fund manager who has consistently justified an above-average fee is the legendary Bill Miller of Legg Mason Value who has posted S&P 500-busting returns for nine years straight. Alas, Miller's Legg Mason funds are not among my 401(k) choices. I scour my list and see that two of the 12 international funds and 12 of the 48 domestic-stock funds fail the expense test. That leaves 46 to sort through. It's time to start picking.


This is a corollary to the bargain-hunting rule above: Index funds tend to outperform actively managed funds in the long run, partly because their fees are almost always much lower.

The other reason to favor index funds is that most of us, pros included, can't consistently pick winners year in and out. Some money managers make a convincing case that indexing isn't the best strategy in less efficient markets, such as small-cap or international stocks. But to me it's hard to argue against indexing the large-cap market in the long run.

I'm happy to see that I have two such large-cap options in my new 401(k): Domini Social Equity and a U.S. Equity Index fund that tracks the S&P 500. The latter is what's called a "commingled pool" of big institutional money instead of an ordinary mutual fund serving individual investors (see "Everybody into the Pool" on page 87), and like most such setups, its asset base is large and its overhead and marketing costs are extremely low. Its expense ratio is only 0.1% (compared with 0.3% for the Domini fund's institutional shares). Sounds like a keeper, so let's bid farewell to Domini.

By the way, if your plan doesn't have a large-cap index fund, make your displeasure known to the human resources department: An S&P 500 or Wilshire 5000 index should be standard 401(k) fare, and there's no reason not to have that option. Until you do, read on for tips on choosing actively managed names.


I next take advantage of the weeks' worth of homework my co-workers and I did when we devised this year's MONEY 100 list of top mutual funds. You can too by pulling out the June issue or toggling to our website, Also turn to reliable third-party sources like, which offers analyst picks in numerous investing categories.

I find that seven of the remaining 45 funds are on the MONEY 100, including Janus and Janus Worldwide. Here's a nice bonus: These funds recently were closed to new investors--but not to folks investing via 401(k) plans that were already signed on. I also come up with Dreyfus Appreciation, Fidelity, Fidelity Diversified International, MAS Mid Cap Growth and Neuberger Berman Partners.


I've singled out eight funds to work with so far, including the U.S. Equity Index, but I have no small-cap name yet. (There weren't many among the 103 options to begin with.)

Most of the remaining funds on my list are from Fidelity, and that's a plus. John Rekenthaler, my former boss and head of Morningstar's research efforts, notes that you're unlikely to go wrong with a fund from heavyweights like Fidelity, Vanguard and American. His minions recently ran numbers showing that these families boast three times as many funds with above-average category ratings as below-average funds.

"These companies attract top-quality people and have below-average expenses, which leads to better funds overall," John explains. "Besides having a higher percentage of winners, they have almost no real dogs. When they have a problem fund, they can throw resources at it, as both Fidelity and Vanguard have done in recent years. They have a will to win and higher standards than most."

Perfect: I spot Fidelity Low-Priced Stock, which invests in U.S. small-caps. I double-check at Morningstar's site, and the fund is indeed rated above average in its category.


I'm down to a manageable nine funds. All I need to do is pick a handful and put them together to fit my recommended allocation. But I want to go a step further than the broad breakdowns suggested by Fidelity in its 401(k) background materials. Instead of considering only whether funds buy large-cap stocks or smaller names, I also want to offset aggressive, risky growth styles with more conservative value-priced plays. (For more on investing styles, see Walter Updegrave's Investing 101 on page 79.)

In 1999 the typical large-cap growth fund returned 42%, while the average value counterpart gained 7.3%. But the lesson for me is not "Go growth!" No, I'm the slow-and-steady sort. After all, large-cap value beat large-cap growth from 1992 through 1995. And the value indexes have surged in this year's third quarter.

I could make a guess on style by the fund names, but that method has a high margin of error (see "What's in a Name?" on page 96). I look through my papers to no avail, but then I find each fund's style noted on Fidelity's website.

My broad U.S. Equity Index fund covers both growth and value, so I don't need any of the large-cap names remaining to add balance. (Otherwise, I'd have gone for Dreyfus Appreciation or Fidelity, both of which are designated in the MONEY 100 as having "blend" portfolios that don't lean heavily toward either growth or value.)

MAS Mid Cap Growth is a great aggressive play, and it pairs well with Fidelity Low-Priced Stock, which holds cheaper and smaller names. I also go for Fidelity Diversified International over Janus Worldwide. The latter doesn't give me the pure foreign-stock exposure my asset-allocation plan calls for--if a fund calls itself "world" or "global," it probably has a significant U.S. stake.

So I've struck what I think is a good balance: U.S. Equity Index, MAS Mid Cap Growth, Fidelity Low-Priced Stock and Fidelity Diversified International. And then the emotional side of me rebels. That 50% weighting in an S&P 500 index fund may make perfect academic sense, but it's awfully stodgy, isn't it? I can't resist adding a dash of Janus Worldwide after all, given star manager Helen Young Hayes' winning collection of global growth names. I think I'll stick 5% from my large-cap allocation there.

Sure, I could run through this list 10,000 ways and build other combos just as effective in the long run, especially given my familiarity with a wide variety of funds. But this group--a low-cost, diversified collection from quality fund families--has an excellent chance of helping me meet my goals. And I picked it using a process that you can easily replicate.


I'm ready to act when my anniversary rolls around. But I admit that when the time comes, I'll be tempted to fuss some more. There are so many intriguing names on the list--and this is what I do for a living, after all. For one thing, while I couldn't easily find information on the actively managed commingled pools in my plan, it's probably worth investigating these low-cost vehicles. I may also look into Domini Social Equity's various socially conscious screens and decide if they make the fund worth the extra expenses to me.

Like many plans, my 401(k) has special deals that one can't get elsewhere, which might tempt me to bend my own rules. MONEY deemed David Alger one of the 10 best managers of the 1990s last February, yet his retail funds' expense ratios aren't low enough that they compensate for the sales charges, in my book. But his retirement share classes offered in my 401(k) are less costly, if not cheap enough to pass my first screens, and Alger's stock picking may be worth that price. And I could reconsider my bond ban: Bill Gross' Pimco Total Return is a standout in my plan. His fund's cheapest institutional shares merit five stars from Morningstar. The priciest shares sold to ordinary investors? They get only three.

If you're a fund fanatic, you might eagerly take more than an hour to figure out whether or not that Fidelity Convertible Securities fund is really a brilliant way to ride bumpy tech and telecom names with an income cushion. (I can't decide.) Tool around the sites in our resources box and you'll find that you can research, rank and rate to your heart's content. If this is the sort of thing that you do for fun, you will also find insight served up with humor at

Even if you don't analyze portfolios for fun, a little extra time can have a big payoff. Consider these kinds of moves:

Allocate around company stock. If your employer match is in company stock and you've been there awhile, ponder the ramifications of this stake. If you work for, oh, Time Warner, you may find that you have more exposure to the company stock than you thought because many large-cap mutual funds hold big slugs of Time Warner and impending partner AOL.

Perhaps you aren't allowed to sell your 401(k) company stock until you're 55; you can always allocate your other investments to compensate, following a portfolio-analysis tool at sites like or

Work as a team. The couple that plans together retires sooner--and better--together. If your spouse has a 45% stake in Lucent, you both should organize around it: With so much of the family's assets in one telecom stock, you ought to think twice about that hot specialty communications fund your own plan just added. Or perhaps your partner's plan has a low-cost large-cap index option, but no small-cap funds. A tool such as Morningstar's ClearFuture or Financial Engines can help you map out your own 401(k) to align with your partner's picks.

Forecast your retirement prospects. Just as you can't predict future investment returns, there's no way to calculate with certainty whether you'll be bumping into me in the Himalayas in 2025. But you can make a good guess using a Monte Carlo simulation. The name hardly inspires confidence, but Financial Engines uses the system to provide sober (and sometimes sobering) predictions of your chances for success, and Morningstar's ClearFuture provides similar forecasts based on probabilities. Use one to figure out moves to boost your odds. Our own site, MONEY.COM, uses a version of the Financial Engines formula for our own retirement calculator.

See how far your money will go. Think you're ready for the big day? T. Rowe Price's Retirement Income Manager can help you figure out how much you can safely withdraw from your plan each year. See the "Resources" box above for the website.

Now stop agonizing: If you've come this far, I bet you're well on your way to the retirement you deserve.