What Happens When You Don’t Choose Investments for Your 401(k)?

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It’s important to actively invest your 401(k). Read on to see why. 

As of March 2023, the average 401(k) plan balance was $78,800, according to Bank of America. That’s down from $86,000 from a year prior. But it’s also not so shocking, seeing as how the stock market had a pretty volatile year.

No matter what your 401(k) plan balance looks like, it’s important to take an active role in investing your money. If you don’t, you may not end up happy with the results.

Take control of your 401(k) plan

It’s wise to invest your 401(k) so your money grows into a larger sum over time. And if you don’t choose investments for your 401(k), you might automatically have your plan invested in a target date fund. Most 401(k)s have target date funds as their default option when savers don’t choose their own investments.

A target date fund is a fund that adjusts your asset allocation as a specific milestone nears. In the case of a target date fund for retirement, what will generally happen is that you start off investing in more aggressive assets, like stocks, and then shift toward more conservative ones, like bonds, as your target milestone — retirement — gets closer.

Now, there is a benefit to investing your 401(k) plan in a target date fund, and it’s that you don’t really have to put much thought into the process. Rather, your target date fund will do the work for you.

To put it another way, a target date fund is one of those “set it and forget it” investments. And if that’s what you want, then you may end up happy with that choice.

But target date funds have their downside. For one thing, these funds will sometimes invest too conservatively. That could mean ending up with less savings once you’re ready to kick off retirement.

Also, target date funds are notorious for charging high fees. Those fees could eat away at your 401(k) returns over time, leaving you with — you guessed it — less money.

Don’t sit back and do nothing

Investing a 401(k) plan can be tricky. Unlike IRAs, which allow you to invest your retirement savings in individual stocks, 401(k)s generally do not give you this option. Rather, you’re limited to different types of funds.

But it could work to your benefit to invest in broad market index funds rather than target date funds. Index funds tend to come with much lower fees because they’re passively managed — they simply track the performance of different market indexes, like the S&P 500. And you might end up with better returns from an index fund that’s stock-focused than a target date fund, which may invest your money more conservatively.

All told, a lot of people invest their 401(k)s in target date funds. But that doesn’t make them the best choice. So rather than let your 401(k) effectively invest itself, do yourself a favor and choose your own investments. And if you’re eager to buy individual stocks but can’t do so in your 401(k), consider opening a brokerage account and holding some stocks there to further diversify your total portfolio.

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