How do I choose 401k investment funds?

Question

I recently opened up my 401k. I will admit, that I did not do much research in choosing my investment option distribution.

Does anyone know of a good book (or other resource) to guide me in my 401k choices? I am not asking to be spoon fed, but honestly I am not sure where to start.

EDIT: I am only a year out of college, so I am sure I want to be pretty aggressive.

For reference, see below.

Currently, I am investing in. I chose them basically based on past returns that are listed.

Stock Investments   LARGE GROWTH    XXX S&P MGD AGGR GTH    10%
Stock Investments   --  XXX MELLON SP MDCP B    10%
Stock Investments   MID VALUE   XXX/GS MID CAP VAL B    10%
Stock Investments   SMALL VALUE     ABF SM CAP VAL INV  10%
Stock Investments   SMALL GROWTH    WFA SM CAP OPPTY ADM    10%
Stock Investments   --  XXX TRP ESTAB GRTH B    10%
Stock Investments   --  XXX TROWE MDCP GTH B    40%

These are my available funds.

   Investments              1 YR    3 YR    5 YR    10 YR   Life    As of Date
ASSET ALLOCATION FUNDS
Stock Investments
XXX S&P MGD MOD GRTH
Inception Date 04/09/1998   21.39   4.06    4.65    4.77    4.97    06/30/2011
XXX S&P MGD AGGR GTH
Inception Date 04/08/1998   30.77   2.74    3.61    4.07    4.85    06/30/2011
XXX S&P MGD CONSV
Inception Date 10/04/2004   10.43   4.40    4.46    N/A     4.60    06/30/2011
XXX S&P MGD MODERATE
Inception Date 10/04/2004   15.90   4.18    4.62    N/A     5.35    06/30/2011
Blended Fund Investments*
XXX S&P MANAGED GRTH
Inception Date 04/08/1998   28.22   3.36    3.95    4.51    5.01    06/30/2011

INDEX/PASSIVELY MANAGED FUNDS
Stock Investments
XXX MELLON S&P 500 B
Inception Date 01/15/2002   30.17   2.88    2.50    N/A     3.02    06/30/2011
XXX MELLON SP MDCP B
Inception Date 01/15/2002   39.03   7.23    6.09    N/A     8.16    06/30/2011
XXX MELLON SM CAP B
Inception Date 01/15/2002   37.16   7.24    3.66    N/A     6.70    06/30/2011
XXX MELLON INTL B
Inception Date 01/15/2002   31.51   -2.10   1.12    N/A     6.81    06/30/2011
Bond Investments
XXX MELLON BD IDX B
Inception Date 01/15/2002   3.41    5.75    6.01    N/A     4.83    06/30/2011

ACTIVELY MANAGED FUNDS
Stock Investments
WFA SM CAP OPPTY ADM
Inception Date 08/15/1996   18.63   5.33    6.70    8.87    11.02   07/31/2011
ABF SM CAP VAL INV
Inception Date 03/01/1999   20.86   7.10    3.90    9.14    10.81   07/31/2011
XXX/WMC VALUE
Inception Date 09/30/2002   28.32   2.80    3.75    N/A     10.35   06/30/2011
XXX TRP ESTAB GRTH B
Inception Date 05/15/1995   33.67   4.04    4.79    3.73    8.95    06/30/2011
XXX TROWE MDCP GTH B
Inception Date 05/15/1995   38.19   8.79    8.36    8.12    12.38   06/30/2011
XXX/GS MID CAP VAL B
Inception Date 05/02/2005   36.14   5.09    5.09    N/A     7.16    06/30/2011
MFS INST INTL EQUITY
Inception Date 01/30/1996   20.59   4.07    4.36    8.62    8.63    07/31/2011
Bond Investments
XXX PIMCO TOT RTRN B
Inception Date 03/02/1998   5.19    8.59    7.94    6.55    6.40    06/30/2011
XXX PPM AM HY BOND B
Inception Date 05/15/1995   17.39   8.42    5.87    6.05    5.98    06/30/2011
Short Term Investments
XXX ASSOC ANNUITY
Inception Date 06/02/1999   N/A     N/A     N/A     N/A     N/A     N/A
XXX/WMC MONEY MARKET
Inception Date 05/15/1995   0.00    0.39    1.99    1.87    3.07    06/30/2011

Answer 1

Here is the "investing for retirement" theoretical background you should have.

You should base your investment decisions not simply on the historical return of the fund, but on its potential for future returns and its risk. Past performance does not indicate future results: the past performance is frequently at its best the moment before the bubble pops.

While no one knows the specifics of future returns, there are a few types of assets that it's (relatively) safe to make blanket statements about:

• Stocks can have high returns, and will do the best over the long term, but the stock market fluctuates wildly. If you can sit around and wait for it to recover, you'll still do well, but if you need your money in a hurry you could be in big trouble.
• Bonds are much less risky - but don't have as good of returns, so you'll make less money.
• Cash has virtually zero risk of losses, but the returns are very low. Sometimes the real rate of return on cash is negative. (The real rate of return is what you get when you adjust it for inflation.)

The future returns of your portfolio will primarily be determined by your asset allocation . The general rules look like:

• start buying stocks when retirement is a ways off, and you won't need the money soon and can deal with a temporary loss
• gradually switch over to bonds as you get older, since you will need the money soon and can't deal with a loss

There are a variety of guides out there to help decide your asset allocation and tell you specifically what to do.

The other thing that you should consider is the cost of your funds. While it's easy to get lucky enough to make a mutual fund outperform the market in the short term, it's very hard to keep that up for decades on end. Moreover, chasing performance is risky, and expensive. So look at your fund information and locate the expense ratio. If the fund's expense ratio is 1%, that's super-expensive (the stock market's annualized real rate of return is about 4%, so that could be a quarter of your returns). All else being equal, choose the cheap index fund (with an expense ratio closer to 0.1%).

Many 401(k) providers only have expensive mutual funds. This is because you're trapped and can't switch to a cheaper fund, so they're free to take lots of your money. If this is the case, deal with it in the short term for the tax benefits, then open a specific type of account called a "rollover IRA" when you change jobs, and move your assets there. Or, if your savings are small enough, just open an IRA (a "traditional IRA" or "Roth IRA") and use those instead. (Or, yell at your HR department, in the event that you think that'll actually accomplish anything.)

Answer 2

I would stay away from the Actively Managed Funds. Index funds or the asset allocation funds are your best bet since they have the lowest fees.

What is your risk tolerance? How old are you?

I would suggest reading:

1. The Only Investment Guide You'll Ever Need by Tobias
2. The 4 Pillars of Investing by Bernstein

Answer 3

I disagree strongly with chasing expenses. Don't chase pennies until your are comfortable with an allocation that makes sense to you.

Focus on building a diversified portfolio. Look at all of the funds, and put them in a portfolio in a tool like Google finance. Screen out funds with 1-3 stars.

Search around on this site for questions about portfolios -- there's good advice there. If you're still not comfortable, look for a fee-based advisor.