A Guide to Choosing 401(k) Mutual Funds and Asset Allocation

Many times, people ask me for advice on how to choose which mutual funds in their 401(k) to select and how much they should allocate to each of them. In writing this, I am assuming that the 401(k) in question offers a variety of mutual funds, specifically, a large cap fund, a small cap fund, a bond fund, an international fund and a money market fund.

If you are financially savvy, you should first consider if it makes sense to contribute to your 401(k) in addition to, instead of, or only when an IRA account has been fully utilized. There are a lot of considerations when making this decision and plenty of financial calculators to help make this decision. Also, you should consider the quality of the funds offered in your plan. How have they performed in relation to their peers over the long-term? How is the fund manager? Has anything changed? How do the funds expenses compare to industry standards? If your employer offers any type of match, it is almost a given that you should contribute to your 401(k) to the point of maximizing the employer's match. After all, this is FREE MONEY, and higher-expenses and lower returns usually can't undo this benefit.

For the less financially savvy or those who struggle with the discipline to invest regularly, investing in your 401(k) is the easiest way to put aside some money. After all, if you never see the money in your paycheck, you can't spend it! However, how do you choose which mutual funds to utilize and how much to contribute to each? The guy in the next cubicle just said that the International fund has done well this year-should you go "all in", as he so eloquently put it? NO!!!

How to invest in the right 401k plan to increase your profits over time.

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