401(k) plan participants are given a limited menu of investment options and must choose how to allocate their retirement savings. Younger 401(k) investors tend to select equity funds, while older participants often have a growing interest in protecting part of their savings using bond funds, stable value funds and money funds. Many new 401(k) participants are also automatically enrolled in target-date funds that contain a shifting mix of a variety of asset classes. Here's a look at the most commonly selected 401(k) investments, according to a recent Employee Benefit Research Institute analysis of 24.9 million 401(k) plan participants.
[Read: How Your 401(k) Balance Stacks Up.]
Equity funds. Equity funds are the most popular 401(k) investment, and the EBRI report found an average of 43 percent of participant account balances were invested in equity funds in 2014. Younger 401(k) participants tend to have higher concentrations of equities than their older counterparts. "For most younger people, being financially aggressive makes sense because this is money you are not going to touch until probably after age 65," says Emilie Goldman, a certified financial planner for Tamarind Financial Planning in San Mateo, California. "Investing 75 percent in stocks or 85 percent in stocks might make sense."
Balanced funds. Balanced funds, which invest in a mix of equities, bonds and cash, are increasing in popularity and now make up a quarter of 401(k) account balances, up from 15 percent in 2008. Target-date funds are the most popular type of balanced fund, and contain 18 percent of 401(k) assets, EBRI found. The mix of asset classes in a target-date fund gradually changes to become more conservative over time.
Target-date funds are frequently the default 401(k) investment for participants who are automatically enrolled in a 401(k) plan. "They are a good all-in-one solution that you don't have to think too much about," says Raquel Hinman, a certified financial planner for Hinman Financial Planning in Erie, Colorado. "It's a much better solution overall than trying to pick funds on your own." However, remember to review how the investment allocation of the fund changes over time. "Look at the inside investments to figure out how to get a target allocation that matches your risk tolerance," Hinman says. "The negative side is sometimes target-date funds can be a little bit more expensive when you are looking at the fund fees."
Bond funds. 401(k) participants have an average of 8 percent of their retirement savings invested in bond funds, the EBRI report found. The popularity of bond funds increases with age, from 4 percent among people in their 20s to 10 percent for 60-somethings. "People tend to have more as they grow older because they want to have more predicable returns that they can live off of," Goldman says. "Bonds will moderate the ups and downs a little bit."
[Read: 5 Little-Known 401(k) Plan Perks.]
Company stock. It is primarily large employers that offer company stock as a 401(k) investment option, and about 7 percent of 401(k) plan assets are invested in company stock. Holding a large amount of stock from the company you work for can be risky, and you could lose a large amount of your savings as well as your job if the company doesn't perform well. "Don't hold more than 5 percent, maybe 10 percent, of your net worth in that company stock," says Paul Sydlansky, a certified financial planner for Lake Road Advisors in Binghamton, New York. "That means selling those positions as you acquire that stock."
Stable value funds. Investors are more likely to select stable value funds as they age, and the average allocation increases from nearly 2 percent among 20-somethings to just over 10 percent of those in their 60s, EBRI found. Some 6 percent of all 401(k) assets are invested in stable value funds.
Money funds. These relatively conservative funds contain 4 percent of 401(k) assets. Money funds are more popular among older 401(k) participants than people in their 20s and 30s, according to the EBRI report. "In a money fund you're not even protecting principal because many of those funds pay less than standard inflation," Sydlansky says. "You are actually losing money by keeping it there."
Emily Brandon is the author of "Pensionless: The 10-Step Solution for a Stress-Free Retirement."
More From US News & World Report