How to Invest Your 401(k)

401(k) Investment Options and How to Allocate Your Investments

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Updated Feb 27, 2026

Wondering how to allocate your 401(k)? Here’s an overview of how to manage what might be your most significant retirement account.

Get familiar with the investment options in your 401(k)

When it comes to investing within a 401(k), first look at what’s offered to you.

Employers and plan providers tend to make a fixed number of investment options available. Typically you can't invest in individual stocks and bonds, but you usually can invest in mutual funds, ETFs or index funds.

Your 401(k) will probably offer at least one fund in each of the following categories:

U.S. large cap: These primarily invest in very large American companies.
U.S. small cap: These primarily invest in relatively small and medium-size American companies.
International: These primarily invest in the markets, companies and financial instruments of non-U.S. countries.
Emerging markets: These primarily invest in the markets, companies and financial instruments of developing economies.
Alternative assets: These primarily invest in natural resources, real estate, private equity and similar instruments.
Bonds: These primarily invest in bonds from a variety of companies or countries. Many bond funds focus on certain types of bonds (such as high-yield bonds or I bonds), bonds from certain countries or bonds from companies in certain industries.

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How to think about asset allocation in your 401(k)

Asset allocation refers to how your money is divided between the different investments within your account. This is one of the most important aspects of 401(k) investing, as it determines how your portfolio may grow over time.

Deciding your asset allocation – and as such, determining your 401(k) investing strategy – starts with knowing how much risk you're comfortable taking. That can help you develop a long-term financial plan that's right for you.

Typically, investors take more risk with their 401(k) investments when they're young (while they have time to recover from any bear markets).
Investors gradually dial the risk down as retirement approaches.

Careful asset allocation can spread out risk via diversification. For example, that might mean putting 50% of your equity allocation into a U.S. large cap fund, 30% into an international fund, 10% into a U.S. small cap fund and spreading the remainder among categories such as emerging markets, alternative assets or bonds.

Consider how you'll react if the market gets rocky and your portfolio begins to lose value. If that idea makes you nervous, you may want to take less risk. Talking with a good financial advisor can help you learn more about how much risk to take with your 401(k).

» MORE: What's your risk tolerance? Take our quiz

🤓 Nerdy Tip

A shortcut some people use is to subtract your age from 110 or 100 to find the percentage of your portfolio that should be invested in equities. Using 110 will lead to a more risk-tolerant portfolio; 100 will skew less risk-tolerant. This method does not consider your personal financial situation, however, nor does it consider other important factors.

» Learn more: How to retire early

Two tips for investing your 401(k)

Minimize expense ratios

Expense ratios are the fees your investments charge, and they range widely. They are a percentage of the amount invested.

Index funds tend to have the lowest fees. They track an index, such as the S&P 500. Because there's little "stock-picking" or buying and selling for the fund manager to do, index funds are usually less expensive than a mutual fund that is actively managed by the fund manager and thus may cost more.
Small differences in fees can have a huge effect over time. For example, if you’ve invested $100,000 at a 7% annual return, a fund with an expense ratio of 0.80% could eat up $70,000 more of your returns over 30 years than a fund with a 0.40% expense ratio.

Expense ratios are disclosed on your 401(k) plan provider website, as well as in each fund’s prospectus.

🤓 Nerdy Tip

You can search for risk ratings for specific funds on your plan provider’s website or on Morningstar.com.

» Want to compare? See the average 401(k) balance by age

Know when to outsource

If you’re nervous about the best way to invest your 401(k), there are two other things to consider:

Target date funds. Target-date funds, also called life-cycle funds or target-retirement funds, are mutual funds that automatically rebalance their mix of stocks, bonds and money market accounts as you age. Target-date funds invest in other mutual funds (a “fund of funds”) to build a diverse portfolio. Typically, the investor's intended retirement year is the "target date." These funds are common offerings in 401(k)s.
Hire a financial advisor. A financial advisor can help you understand how much risk you're willing to tolerate, calculate how much you should save for retirement, and decide the best way to invest your 401(k) money.

» Do some research: See our picks for the year's best financial advisors

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