By Matt Becker

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Choosing the right investments within your 401(k) can be confusing.

On the one hand, the limited set of options means you have fewer decisions to make, theoretically making your job a little easier.

On the other hand, those options aren’t always good, which can force you to settle for lower-quality investments than you’d like. And companies don’t always make it easy for you to even figure out what your 401(k) investment options are, making you do the hard work of asking for the information you need and sorting through it on your own.

All of which can be more than a little overwhelming and leave you wondering whether you’re making the best decisions.

But you deserve to make the most of your 401(k), so in this post you’ll learn how to choose the best 401(k) investments available to you.

Quick note: This is a slightly edited excerpt from Investing Made Simple, which guides you through the entire process of creating your personal investment plan from start to finish.

1. Gather the right information

You have to know what your options are before you can make any decisions, so the first step is to contact your Human Resources representative and ask for “a list of my 401(k) investment options and the fees associated with each”.

Sometimes this will be a one-page resource with a simple list of funds and expenses. Sometimes this will be a long document with detailed information about each mutual fund within your 401(k).

No matter what, you need to know what your investments options are and how much each one costs. In particular, you’ll want to know each mutual fund’s expense ratio, as that’s likely to be the most significant cost.

Getting this document will make sure you have that information, and you can always use a website like Morningstar to get even more detail about each fund as well (more on this below).

2. Focus on asset allocation

When your investment options are limited, you may not be able to implement the exact strategy you’d like. For example, it’s often hard to find low-cost international stock market funds within a 401(k), which might be frustrating if that’s something you’d like to include in your plan.

So now is a good time to remind yourself that by far the most important part of your investment strategy (beyond your savings rate) is your overall split between stocks and bonds. That overall balance will do more than anything else to determine your expected risk and return. The specific investments you choose within those categories are not actually all that critical.

All of which means that your main goal should simply be to get your asset allocation right. Here’s a guide that shows you how to figure out what your target asset allocation should be: Asset Allocation: What It Is, Why It Matters, and How to Get It Right.

If your 401(k) allows you to implement the detailed investment strategy you want, then great! But if not, that’s okay. All you really need to worry about is finding one decent stock fund and one decent bond that allow you to match that asset allocation.

3. Check for target date options

Most 401(k)s now offer a lineup of target date retirement funds, which are really just all-in-one funds that give you access to a wide range of investments within a single mutual fund.

These funds aren’t perfect and they don’t guarantee any kind of performance. But they can be a good and easy way to implement your investment strategy, so this is where I would look first.

Find the target date funds in your list of investment options and check the expense ratios. If they’re reasonable (below 0.50% or so, though ideally below 0.20%), then you can keep going. If not, move on to Step 4.

What you want to do is find the target date fund that best approximates your target asset allocation. You probably won’t be able to hit it exactly, but you can likely get close.

So, how do you figure out a target date fund’s asset allocation?

First, ignore the year in the title of each fund. Those often don’t correspond to your personal investment preferences.

Second, you may be able to find each fund’s asset allocation in the document you received that lists all of your investment options. Look there first.

If you can’t find it there, you can look it up on Morningstar using the following steps:

Enter the fund’s ticker symbol into the Quote field at the top of the page. Click on the Portfolio tab. In the Asset Allocation section, add the value in the % Net column for Cash to the value in the % Net column for Bond to figure out the percentage of the fund that should count as “bond” in your asset allocation. If that matches or comes close to the bond percentage of your personal asset allocation, you can feel comfortable using that target date fund.

4. Try to find two reasonable funds

If your 401(k) doesn’t offer good target date funds, you’ll have to see if you can find at least one reasonable stock fund and one reasonable bond fund so that you can match your target asset allocation.

The good news is that most 401(k)s, even the bad ones, have at least one low-cost S&P 500 index fund that you can use. So in most cases, handling the stock portion of your asset allocation should be fairly simple.

Bonds are less reliable. Look for funds with the word “index” in the title, and possibly words like “total bond market”, which should indicate that the fund represents the entire US bond market. And of course, look at the expense ratio of each fund to make sure it’s not too expensive.

In some cases you’ll have a number of great options you can be really happy with, and you may even be able to include international stocks or bonds as well. In other cases you’ll have to choose from some disappointing funds.

Just do the best you can with the options you have.

5. Fill out your portfolio elsewhere

Remember that even if your 401(k) is filled with terrible mutual funds, it’s still worth contributing enough to get the full employer match. That’s still a better deal than you’ll find elsewhere.

Beyond that, if you don’t have a reasonable target date fund and you can’t find two low-cost mutual funds to match your target asset allocation, it’s probably best to contribute to other tax-advantaged accounts before contributing to your 401(k) above what’s necessary to get the employer match.

And remember that when it comes to hitting your target asset allocation, the real goal is to make sure that your portfolio as a whole has the right asset allocation. Each individual account can differ as long as it all adds up when you total everything across all accounts.

So if you’re in the situation of having one good S&P 500 index fund in your 401(k) and nothing else you want to invest in, it could make sense to put 100% of your 401(k) into that fund and fill out your bond funds in other accounts. You may or may not be able to do that depending on your balance in each account, but it’s certainly an option.