What Are the Safest Investments for a 401(k)?

Contributing to a 401(k) is an important part of saving up for retirement for many people in the U.S. Typically, you won’t withdraw funds from your 401(k) until you reach the age of 59½, which means these employer-sponsored retirement accounts have years, often decades, to grow in value. 

You can choose from a number of different investment options, such as stocks and mutual funds. Some people have a higher risk tolerance and opt for aggressive investment options in hopes of reaping higher returns. Other people prefer a more conservative approach that minimizes risk to their 401(k) value. Risk is inherent to investment, but some 401(k) options remain relatively stable over time. 

Key Takeaways

  • Many employers offer their employees the option to choose the kind of investments in their retirement accounts. If you prefer a risk-averse approach to investment, you can choose some safer options for your 401(k). 
  • Lower-risk investment types can help maintain the value of your 401(k), but it is important to consider that lower risk usually means lower returns
  • Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k). Each investment type has its own risk profile to consider. 

Bond Funds

Bond funds are a type of pooled investment vehicle for debt securities. Bond funds typically focus on a particular type of bond, such as government bonds. Some bond funds are broad while others opt for a narrower focus. Risk levels vary depending on the type of bond fund you choose, but bond mutual funds are usually considered a more conservative investment than stock mutual funds.

Bond funds that focus on government bonds, such as Treasury inflation-protected securities (TIPS), are considered one of the safest options. TIPS are very low risk because investors receive either the adjusted principal or original principal, whichever is the larger amount. The return potential is relatively low, but you will never receive less than what was originally invested.

Money Market Funds 

Money market funds mitigate risk in a 401(k) by maintaining a stable value. This type of investment is meant to offer a high level of liquidity with a low level of risk. Like bond funds, money market funds invest in debt securities. Money market funds are grouped into three categories: government, prime, or municipal investments. Like other lower-risk investments, the returns on money market funds tend to be lower.

While money market funds tend to be lower risk, keep in mind that these investments are not insured by the Federal Deposit Insurance Corporation (FDIC).

Index Funds

Index funds help to diversify investment portfolios with broad market exposure, decreasing risk. An index fund is a kind of mutual fund. Exchange-traded funds (ETFs), sometimes found in 401(k) investment lineups, are a type of index fund. Index funds aim to track the returns of a market index, such as the S&P 500 Index or the Wilshire 5000 Total Market Index. This type of fund is considered passive investing; index funds look to maximize investors’ returns in the long term. 

While index funds introduce diversification to your 401(k), keep in mind these investments are not immune from market fluctuations.

Stable Value Funds

Stable value funds, similar to money market funds, are a conservative investment approach that still comes with higher yields. As the name suggests, this investment option can help to keep your 401(k) stable during periods of market volatility. These bond portfolios come with insurance, which means you will receive interest payments despite what is happening in the economy.

While stable value funds guarantee the principal investment as well as steady returns, those returns will likely be lower than those you could earn through higher-risk investments.

Target-date funds help you to manage risk in your 401(k) but they are not risk-free investments. Income from a target-date fund is not guaranteed.

Target-Date Funds

Target-date funds (TDFs), also called lifecycle funds, are an investment option designed to recalibrate risk as you move toward your chosen retirement date. Target-date funds take a more aggressive approach when you are younger and automatically shift to a more conservative approach as you near your anticipated retirement. Target-date funds are a type of mutual fund.

You can establish a target-date fund to take you up to retirement or through retirement. If you opt to go up to retirement, the fund will reach its most conservative investment approach at that point and maintain it. If you decide to have the fund go through retirement, the target-date fund will continue to adjust its level of risk, reaching its most conservative point after the retirement date you have chosen. 

When Does It Make Sense To Mitigate Risk in a 401(k)?

It is natural for the value of a 401(k) to fluctuate during its lifecycle. As you draw closer to retirement, you can opt for less risk to maintain a more stable value. If you tend to take a more risk-averse approach to investment regardless of your retirement timeline, you have the option to select safer investments earlier on in your career. 

How Can You Choose Safer Investments for Your 401(k)?

Understanding your retirement timeline and your risk tolerance will help guide you during the investment selection process. Many 401(k) plans have a default investment, which could be a managed account, balanced fund, or lifecycle fund. If you prefer safer investments, you can evaluate each of the options available through your employer’s plan to find the mix that matches your comfort level. 

Can Your View on Risk Change Over Time?

A typical 401(k) plan will have eight to 12 options but some may have more or less than that. You can rebalance your 401(k) assets to ensure they reflect the asset allocation and risk tolerance, you want. You can also make changes to your 401(k) investments to reflect your evolving risk tolerance. Check with your employer or HR department to see how often you can make changes to your 401(k) investments. 

The Bottom Line

Everyone has a different risk appetite when it comes to investing. Your 401(k) will be affected by market cycles over the course of its lifetime, but some investment choices will ensure more stability than others. If you prefer to play it safe, there are a number of lower-risk investment options that you can explore for your 401(k).

Article Sources
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