A 401(K) plan usually offers a selection from 10 to 12 investment funds, so how does one choose the right plan for themselves?
For most investors, limited choices are an advantage as it simplifies the process. However, experienced investors may find it quite restrictive, and choose to go with IRA as it offers unlimited selection.
As per the experience of William Schantz, you should consider the following two factors when selecting a 401(k) plan:
Returns over a long term: The returns on your fund over the period of 5 to 10 years
Expense ratio: The total cost of holding the fund per year
According to Schantz, you should be looking for a plan that offers the best returns at a minimum cost. That might sometimes require compromising on performance in exchange for a lower cost. If you want to avoid that, then you can also opt for a higher fee that offers better returns over the long term.
Make sure you pay attention to the long-term performance of a plan. Many plans offer good returns over the first couple of years, but their performance declines significantly after that.
Target-date funds are another excellent option if you want a fund that provides the exact amount that you need on your given retirement date. With this method, the fund makes the investment choice for you, and you’re provided with your desired fund at retirement. It’s a custom-made solution, so it costs a little more.
If you think, that’s the right path for you then you’ll have to manage your own portfolio, let’s discuss how to do that below.