Investing in a Company Retirement Plan

Investing in a company retirement plan (401K/403b/457/TSP) does not have to be complicated, but you MUST do a little research before making the most of this great opportunity. When your employer offers a retirement plan, they must provide you with the details about the plan. Read the booklet, and look for those low-cost, broadly diversified index funds. ALWAYS keep your costs as low as possible when investing.

Before we move on let me say just a few small words about borrowing against your retirement plan. Don’t do it! People borrow money against their retirement plan all of the time, and this is again another reason why so many people are BROKE! Do not borrow money out of your plan.

Retirement Plan Basics

You may have a target retirement or lifecycle fund in your plan that says something like Target Retirement 2020 or 2040. The 2020 fund may have a breakdown of 30% U.S. Stocks, 20% International Stocks, 45% Bonds, and 5% Money Market funds (cash). The 2040 fund may have a breakdown of 56% U.S. Stocks, 32% International Stocks, 10% Bonds, and 2% Money Market funds. As time goes on, those funds will become less aggressive (more bonds and cash, less stocks). They rebalance for you. If you want to use one of these types of funds, go for it. They are simple and a good choice for many. One fund may be all you need.

There is a default fund that your money goes into initially. It is usually a very low-risk investment or a Target Retirement Fund. Your company starts you there, because it is safe or geared to when you hit age 65. Review your options and make changes based on your personal situation and understanding of asset allocation. For all military members and government workers, you will see a list of your funds (in parenthesis) that are basically identical to the fund in front of it. See below.

  • Small Capitalization Fund (S Fund): This fund invests in small growth and value companies in America. This fund can be volatile in any short period of time. As a long-term investment, these types of funds have generally provided one of the best returns on your money (10-12%). Some years you will lose money so be prepared for that.
  • Large Capitalization Fund (C Fund): This fund invests in large companies in America (think S & P 500 businesses). This fund can be volatile as well, but not as much so as the small cap stocks. These types of funds have generally provided a solid return on your money (around 10%). This fund will lose money in some years as well.
  • Developed Markets Capitalization Fund (I Fund): This fund invests in mid to large companies outside of America (does not include emerging markets like China, Taiwan, Brazil, India, etc.). This fund can be volatile. These types of funds have generally provided very good returns over long periods of time (10-12%). This fund will also lose money in some years.
  • Balanced Fund (Lifecycle Funds): This type of fund invests in a combination of stocks and bonds. This kind of fund should provide you a decent return over time (6 to 8% based on how much you have in stocks). This fund will lose money in some years as well, especially with a stock heavy allocation. The bigger number, the more the stocks.
  • Bond Fund (F Fund): This fund invests in bonds (may be identified by the name: fixed income). There will be different maturities of the bonds within this type of fund. They generally come in short, mid, or long term varieties. The shorter the maturity, the lower the relative volatility of the fund. You should expect returns of 3-5% over time with these types of funds. They can lose money, but it will usually be minimal.
  • Money Market Fund (G Fund): This fund invests in money market securities (cash). This is a low-risk fund that will almost never lose money. This is where some 401K accounts start for the beginning employee. Stay out of these funds. There is nothing terribly wrong with these funds except they will produce very small returns over time. 1% a year is not going to cut it.

Roth or Traditional

You want to identify if you have a traditional plan (before tax) or a Roth plan (after tax). You should consider a Roth plan, if you are not making that much money and you expect to pay more taxes later — $60,000 is a rough number to use when deciding. Under $60,000, go with the Roth; over $60,000, go with the traditional. This is not a hard science; make the call after plenty of consideration, when taking into account your own particular situation and the federal and state income taxes you pay. Take your time, and educate yourself about your options before you act.

Retirement Investing Tips

Here is what I would do. If my time horizon was beyond 10 years, I would be as aggressive as possible. This means a lifecycle/target date fund (owning index funds) with the biggest number attached to it. The other option would be to select some combination of a small-cap, international, and large-cap mix, preferably broadly diversified index funds.

Once I came up with a plan, I would sock that money away each month and ignore everyone who tries to predict the market. If I got matching money in individual stock, I would monitor it carefully and sell it one time each year, and then move the money into the funds that I just mentioned. Keeping much, if any, money in your company stock is unwise. Read about Enron, Tyco, and Lehman for further details.

If you are young, you will probably have many employers over your career. Every time you start with a new employer, review their retirement plan carefully and start investing immediately. Find out how long it takes to get vested (the time it takes before that matching money they give you is YOURS). This is usually around 5 or 6 years.

When you leave an employer, take your plan with you. This is quite simple. Go to and have them transfer your money (you want to do this trustee-to-trustee, without touching it yourself to avoid any possible penalties or taxes) into a traditional IRA (from a traditional 401K) or a Roth IRA (from a Roth 401K). DO NOT let your retirement accounts languish at previous locations. Go get it!

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Stuff the lawyer wants me to say: Investing outside a bank or a credit union is not FDIC insured. You may lose the value in the investments you select. All information provided here is for informational purposes only. It is not an offer to buy or sell any of the securities, insurance products, or other products named. Translated: I am not selling anything! Educate yourself, research the information that you learned and finally make the right decisions that will benefit you and your family going forward.

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