Questions to Ask When Choosing Your 401(k) Plan Investments

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LIFE ADVICE
produced by MetLife Corporate Communications and reviewed by The Internal Revenue Service.

Questions to Ask When Choosing Your 401(k) Plan Investments

Each type of investment has its own degree of certainty and uncertainty. Since all investments perform differently, one way to manage risk is to diversify your portfolio by investing in a blend of different types of assets. Keep in mind that 401(k) options are not federally insured, and past performance is not a guarantee of future results. Your employer’s 401(k) plan will most likely offer you a variety of investment choices. Asking the right questions will help you decide on your best investment strategy.

• Have I learned all that I can about each investment? For mutual funds, the prospectus and financial magazines are good sources of information. For other types of investments, talk with your plan administrator.

• How has this investment performed in the past? While past performance is never a guarantee of future performance, it will help to give you an idea of how the different types of investments have performed over time in up and down markets.

• How long do I have before I’ll need the money? If you can leave money in a 401(k) fund for 10 to 15 years or more, you may be able to ride out the ups and downs of the stock in the mutual fund. Over time, stock mutual funds have generally outperformed other options. Keep in mind that some 401(k) plans limit the number of times you can transfer your contributions from one option to another. Some plans let you switch monthly, others quarterly or yearly, while some others allow transfers on any business day.

• How should I “mix and match” my investments? Most financial professionals recommend that you allocate your assets to a variety of investments. Put some of your money in conservative investments with stable rates of return and distribute other assets in investments with greater potential for gains and higher risk. Your ideal “mix” will depend on your circumstances, goals, and tolerance for risk.*

* While diversification through an asset allocation strategy is a useful technique that can help to reduce overall portfolio risk and volatility, there is no certainty or assurance that a diversified portfolio will enhance overall return or outperform one that is not diversified.

• Am I a conservative, moderate or aggressive investor? Even conservative investments may lose earning power if their growth does not outpace inflation. On the other hand, the winner-take-all attitude of very aggressive investors holds the potential for great loss as well as great gain. To help determine where your tolerance for risk lies, review the statements below.

Conservative or Low-Risk Investor:

• I don’t want to risk any of my principal.

• I want a guaranteed rate of interest on my investment.

• I am near retirement.

Moderate or Medium-Risk Investor:

• I can live with some ups and downs.

• I would like a combination of higher and lower risk investments.

• I have some time for my money to grow.

Aggressive or High-Risk Investor:

• I have an iron stomach and can handle market swings.

• I want the highest possible long-term rate of return, even if I risk losing principal.

• I have at least 10–15 years for my investments to grow.

Whatever your investment philosophy, you should never put money in an investment you don’t understand. And, remember to reconsider your investment portfolio periodically. Review it when you experience changes in your life, such as when you get married, divorced, or have a child. It is especially important to examine your investments as you approach retirement age.

Life Advice®