Unless your 401(k) includes a brokerage account, you won’t have as much control over your investment choices as you do in your IRA or your taxable accounts, which you can invest in just about any fund, individual security, or asset you choose.
Employer-sponsored retirement plans, such as 401(k)s, usually offer a range of investment choices. These may include:
One strategy to get the most out of your
401(k) is to focus on your plan’s top-performing funds. Often
a plan includes one or two funds with the highest rating in their
categories, and a number of funds with less distinguished records.
If you focus on the best picks, you can round out your allocation
model with the investments you make in your IRA and taxable accounts.
For instance, perhaps your 401(k)’s
balanced fund achieves consistently high ratings. You may want
to put most of your 401(k) assets in that fund and buy individual
stocks and bonds, or stock funds and bond funds for your IRA and
taxable accounts.
Company stock
If your 401(k) account is overloaded with
company stock, you’ll have to make major adjustments in your
other accounts to compensate for that risk. And you should investigate
adding more balance to the 401(k) itself. One approach may be
to sell some of the stock you accumulate, if your plan allows
it, and reinvest that money in other plan alternatives. Another
may be to calculate the percentage you’re willing to allocate
to any single asset — many experts say 20% is an appropriate
maximum — and restrict your contribution so you don’t
exceed that level. You can put the difference in an IRA, annuity,
or taxable account.
As you approach retirement,
you’ll want to consider shifting more of your
assets from growth investments, such as stocks, into
income-producing investments, such as bonds.
