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I am starting my first 401(k) which will have 9% of my salary invested each month. I have the option of doing a Roth 401(k) or a traditional 401(k) with a range of investment options. I think the traditional 401(k) with investment options is good, but there are 18 different options. How can I choose which one is low-fee, low-risk, and a decent return? These are my options, which, to a first-time 401(k)-holder/investor, are QUITE overwhelming:

Target Date Funds: Vanguard Target Retirement 2055 Fund, Vanguard Target Retirement 2050 Fund, Vanguard Target Retirement 2045 Fund, Vanguard Target Retirement 2040 Fund, Vanguard Target Retirement 2035 Fund, Vanguard Target Retirement 2030 Fund, Vanguard Target Retirement 2025 Fund, Vanguard Target Retirement 2020 Fund, Vanguard Target Retirement 2015 Fund, Vanguard Target Retirement 2010 Fund, Vanguard Retirement Income Fund

Fixed: Nationwide Bank Account, ING Fixed Account

Bond / Core Fixed Income: Calvert Group - Income Fund, Vanguard Total Bond Market Index - Inst.

Balanced: Fidelity Investments - Puritan Fund

Large Cap: Allianz NFJ Large Cap Value Instl, Fidelity Investments - Contrafund, Fidelity Investments - Over-the-Counter (OTC) Portfolio, Vanguard Institutional Index Fund

Mid Cap: Columbia Acorn Z, Columbia Mid Cap Value Z

Small Cap: Brown Capital Management Small Company Fund, Invesco Van Kampen Small Cap Value Fund Y

International: DFA International Value Fund, Fidelity Investments - International Discovery Fund

Brokerage: TD Ameritrade SDB account

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There are not as many options here as you fear.

If you have no other investments outside this 401K it is even easier. Outside accounts include IRA, Roth IRA, taxable investments (mutual funds, ETF, individual stocks), Employee stock purchase plans.

Amount: make sure you put enough in to get all the company match. I assume that in your case the 9% will do so, but check your documents. The company match will be with pre-tax funds.

Roth vs Regular 401K? Most people in their lifetime will need a mix of Roth and Regular retirement accounts. You need to determine if it is better for you to pay the tax on your contributions now or later.

Which accounts? If you are going to invest in a target date fund, you can ignore the rest of the options. The target date fund is a mixture of investments that will change over the decades. Calculate which one fits your expected retirement date and go with it.

If you want to be able to control the mix, then you will need to pick several funds. The selection depends on what non-401K investments you have.

Now here is what I considered the best advice. Decide Roth or regular, and just put the money into the most appropriate target date fund with the Roth/regular split you want. Then after the money starts flowing into your account, research the funds involved, the fees for those funds, and how you want to invest. Then move the money into the funds you want.

Don't waste another day deciding how to invest. Just get started. The best part of a 401K, besides the match, is that you can move money between funds without worrying about taxes. If you realize that you want to put extra emphasis on the foreign stocks, or Mid-cap; just move the funds and redirect future contributions.

  • If you want to be a bit more aggressive, you can pick a target date fund a bit later than your planned retirement. – keshlam Aug 1 '14 at 19:49
  • 4% comes from my check, 5% comes from the employed, I believe. I have to double check. I did not realize you could move funds around in a 401(k). I thought that once you chose an option, it was locked in. – Acornrevolution Aug 1 '14 at 21:27
  • Some companies may restrict the number of moves per month, but that is to stop employees from acting like day traders. – mhoran_psprep Aug 2 '14 at 1:21
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The vanguard funds are all low fee your employer has done a good job selecting their provider for 401(k). I would do a roth if you can afford it as taxes are at a historical low.

Just pick the year you want to get your money if you will need your money in 2040 pick Vanguard Target Retirement 2040 Fund.

Its that simple.

This is not a "thing" ( low-risk, and a decent return ). Risk and reward are correlated.

Get the vanguard and every year it rebalances so that you take less risk every year.

Lastly listen to the Clark Howard podcast if you are having trouble making decisions or contact their 45 hour a week free advice email/phone help.

  • What does rebalancing typically involve? – Acornrevolution Aug 1 '14 at 21:25
  • Every year you are one year closer to retirement so risk goes down a small percentage every year. – Mark Monforti Aug 1 '14 at 23:57
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Great question and good for you for starting investments. Are you young, like in your 20s?

I would do all that you can in the ROTH. You will not get a tax break now, but you will get one later. Keep in mind that any company match does not go into ROTH but the IRA.

I try to look at two things when judging a mutual fund: the historic performance, and the expense fee. When comparing two funds, if one has a 10% average return for 10 years, and a 1% fee, I feel it is better than a fund that has a 12% return for the same time period and a 3% fee.

If they are close, you can always put a little bit in each one.

An important question to ask is if you have debt. You may want to scale back your contributions some to pay down that debt. For me, I don't like to go below a company match to do so, but anything over and above might be better utilized to move that student, car or credit card loan to zero. Others might disagree, so YMMV, but I have done this myself.

  • Most people have mentioned a Roth, so I'll comment here. I read that with Roth funds, there is more money taken out of the paycheck compared to the traditional 401(k). I'd prefer not to diminish my take home pay due to bills, etc. Also, if I don't plan to stay with this company/state for more than a few years, would a Roth make sense? – Acornrevolution Aug 1 '14 at 21:25
  • With Roth you pay with after-tax money, so if you contribute the max you can effectively contribute more to a Roth. If it's too much, though, you don't have to max it out. The real determinant of whether to choose Roth or not is your current tax rate and the rate you expect to pay after retirement. If your tax rate is higher now, Roth is not better. Your tenure at the company is irrelevant to this decision, btw. All these accounts will go with you when you leave. – farnsy Aug 2 '14 at 4:45
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There are a lot of funds that exist only to feed people's belief that existing funds are not diversified or specialized enough. That's why you have so many options. Just choose the ones with the lowest fees.

I'd suggest the following:

  1. Most of your money should be in a fully diversified index fund for the super low fees and basic exposure. In this case that is the Vanguard Institutional Index Fund.
  2. A decent amount can be put in a bond fund. Vanguard again. Some people suggest 20% or 30%. To me that sounds like a lot so I would personally go lower.
  3. A token amount (a few percent each) can go to small cap, mid cap, and international. Chose the fund in each category with the lowest fees.

I wouldn't mess around with funds that try and specialize in "value" or those target date funds.

If you really don't want to think and don't mind paying slightly higher fees, just pick the target date fund that corresponds to when you will retire and put all your money there.

On the traditional/Roth question, if your tax bracket will be higher when you retire than it is now (unlikely), choose Roth. Otherwise choose traditional.

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I agree with the others that the ROTH is probably better. See this list of benefit/cost comparison (as opposed to rule differences)http://en.wikipedia.org/w/index.php?title=Comparison_of_401%28k%29_and_IRA_accounts&oldid=582368417

  • Welcome to Money.SE. Answers should be a bit more comprehensive than just a link. If you'd like, consider editing to include a few of the highlights of the Wikipedia article. Else, you might just offer the link as a comment. (and no, I did not downvote) – JoeTaxpayer Aug 4 '14 at 16:45

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