401(k) Investment Options: All You Need to Know

Retirement means an end to financial earning. To secure your future financially, there are many investment and retirement plans which help you accumulate a part of your savings so that you have a secured financial future. One such retirement plan is the 401(k) plan.
401(k) is an employer-sponsored retirement investment and savings plan that works in the United States.

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Disclaimer: #The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CAGR 8%; ₹50,45,591 @ CAGR 4%. *Tax benefits and savings are subject to changes in tax laws. All plans listed here are of insurance companies’ funds.

In this article, you will get to know all about the 401(k) retirement plan and how it is helpful for NRIs.

What Is 401(k)?

A 401(k) plan, popularly known as an employer-sponsored retirement and investment plan named after a section of the United States Internal Revenue Code. It is a defined contribution plan, which means it is completely up to the will of the employee as to how much they are willing to contribute to their account, subject to annual limitations.

Contributions made by the employee are directly withdrawn from their 401(k) account and invested in the funds of their choice. Employees can invest the money saved in their 401(k) account in one or more mutual funds offered by the plan.

How Does 401(k) Work?

In general, there are 2 types of accounts under the 401(k) plan, mainly differentiated based on how they are being taxed.

Type 1	Type 2
Traditional account	Roth account
These are funded by pre-tax income	These are funded by post-tax income

401(k) Investment Options

A typical 401(k) plan offers a wide range of investments, but any single plan might or might not offer all possible types of investments.

Even though a 401(k) investment plan comes with a variety of options like:

Company stocks
Individual stocks
Bonds
Securities
Variable annuities and much more.

Still, the one that rules the 401(k) investment opportunities is Mutual Funds.

Types Of Mutual Funds Under 401(k) Investments

Mutual funds are the most common 401(k) investment options. The most common Mutual Funds investment options include:

Mutual Funds	Features
Stock mutual funds	May have specified themes, such as value stocks or dividend stocks
Bond mutual funds	May feature specific kinds of bonds, such as short-term or intermediate-term
Target-date mutual funds	Includes both, stocks and bonds. Allocation keeps shifting based on specific target date or based on your retirement plan
Stable value mutual funds	Investment is made in safe assets, such as medium-term or government bonds. Returns and principal are insured against loss. Beneficial for investors near retirement

Range Of Mutual Funds Under 401(K) Investments

The abovementioned mutual funds range from conservative to aggressive, along with many grades in between. All the major financial companies use these similar terms while talking about the Mutual Fund range.

Let us look at the different range of fund types offered under 401(k) investments

Fund Types	Features
Conservative Funds	Avoids risks invests in high-quality bonds and other safe investments money grows slowly minimal chance of facing loss stable value funds come under conservative funds
Value Funds	The fund is in the middle of the risk range invests in solid, stable corporations that are undervalued companies usually pay dividends growth is expected moderately
Balanced Funds	Funds include more risky equities mostly includes value stocks and safe bonds balanced means medium risk involved in investment holdings
Aggressive Growth Funds	As the name suggests, funds include high risk-taking value funds can swing between high profits and great losses suitable for people willing to take the extra risk and have huge capital to invest
Specialized Funds	These are the funds investing in emerging markets, utilities, new technologies, or pharmaceuticals
Target-Date Funds	Includes both, stocks and bonds allocation keeps shifting based on specific target date or based on your retirement plan intends to maximize investment at a particular time investment moves towards the conservative end of the investment

How To Build 401(k) Portfolio?

Instead of investing all your money in one particular fund, it is always considered better to allocate your money around different funds. Allocation of money in different funds increases the probability of better returns. However, it is up to you to decide where and when to invest.

Here are some of the key factors that should be considered before you invest in a 401(k) plan

Financial Goals

It is important to differentiate between how much money you are willing to invest and take the risk upon. The sooner you start investing, the less you have to save to reach your goals later in life.
Diversification Of Funds

Diversification helps in capturing better returns in the end. Investing in mixed investments like stocks, bonds, commodities, and others, while maintaining balance is the best way to diversify your portfolio.
Assessing Risk Tolerance

One should always plan to take risks suitable to their portfolio. Higher the risk, more chances of profits and losses equally.
Time Horizon

More time until you need the money means you can take more risks and generate higher returns. This means that you should invest in such a way that you have ample time to recover if at loss.
Minimize Expense Ratio

You should avoid buying funds with high fees. It is always recommended that in case of options available, one should opt for the lowest cost option, which is an index fund.

The Bottom Line

To have a peaceful retirement or financial independence when you grow old, savings are very important. 401(k) investment is one option that can help you not just to save your money but also grow it over years.

The only thing to keep in mind while going for a 401(k) investment is to allocate your money wisely!

†Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. The sorting is based on past 10 years’ fund performance (Fund Data Source: Value Research). For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-12-2024

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).