How To Read A 401k Fund Menu In Three Steps

The first time I opened my 401k fund menu there were 23 options and they were all assembled from the same handful of words. Growth. Value. Core. Opportunity. Strategic.

I picked the one whose five year number was highest, which is the financial equivalent of choosing a restaurant by the size of its sign.

There are three things on that screen worth reading. Everything else is there because a marketing department had to put something in the field.

The three things

One: what it actually owns. Big American companies, small ones, companies outside the US, bonds, cash. This is the decision that drives almost all of your outcome, and the fund name usually tells you if you know the vocabulary.

Two: what it charges. The expense ratio, the annual slice the fund takes for running itself, quoted as a percentage of your balance and deducted invisibly. This is the only number on the page you can be certain about in advance.

Three: whether it follows a rule or a person. An index fund tracks a published list. An active fund pays somebody to choose. The second costs more, always, and the extra cost is certain while the extra return is not.

What to ignore, and why

The star rating. It is a backward looking score, it changes, and a five star fund charging 0.89% is still charging 0.89%.

The one, three and five year returns. Those numbers are real and they describe what happened to a different set of market conditions. A fund that returned 14% last year tells you what it owned during a good year for whatever it owned.

The manager's name, the fund family's brand, and any adjective in the title. Opportunity, Strategic, Dynamic and Select mean nothing. They are not defined terms.

Decoding the rows

The vocabulary, in six lines

• Index means a rule. The fund buys a published list in published proportions and nobody is exercising judgment.
• Cap means company size. Large cap is the biggest companies, small cap the smallest, mid cap the middle.
• Blend means it holds both growth companies and value companies, so you are not making a bet on which style does better.
• Core usually means the plain version of whatever it is, without a tilt.
• Developed means richer countries. Emerging means the rest. A fund saying international without qualification often means developed only.
• Institutional, Admiral and R6 are share classes. Same fund, cheaper wrapper, usually available only to large plans.

That last one is the sleeper. The same underlying fund can show up in six share classes with expense ratios running from about 0.02% to about 0.95%, and the only difference is which door you came in through.

If your plan offers a retail share class of a fund that also exists in an institutional class, that is a legitimate question for whoever manages the plan. Plans do renegotiate this, and somebody has to ask first.

Sort by cost, then read it again

Almost every menu lets you sort by expense ratio. Do it, low to high, and the screen reorganizes into something informative for the first time.

On a $60,000 balance, 0.04% is $24 a year. 0.89% is $534. Same year, same market, same account, and the difference buys nothing you can point at.

The cheap options are nearly always already on your menu. They are just named so plainly that nobody reads them, sitting four rows down with the word index in the title and no adjectives at all.

When the menu genuinely has no cheap option

It happens, particularly at small employers, where the whole menu runs from 0.60% to 1.10% and there is no index fund on it at all.

Contribute up to the match anyway, because a 50% match swamps even a 1% fee for years. Then put additional retirement money somewhere you control, such as an IRA, where the menu is the entire market instead of twelve funds somebody else picked.

And say something. Plan menus get reviewed, participants asking is one of the few inputs that triggers a review, and the person who fixes a bad menu fixes it for everybody in the building.

What I will not tell you

How much of each to hold. That is asset allocation and it depends on your age, your job security, your other accounts, your timeline and how you behave when the number drops. Anyone who hands you a split without asking those things is guessing in public.

What I will say is the question that gets you most of the way there. Ask yourself what you would actually do if this account fell 30% in a single month. If the honest answer is that you would sell, own less stock than the formulas suggest, because a portfolio you abandon at the bottom is worse than a cautious one you keep.

A target date fund is the honest answer for most people who do not want to make this decision every year. It chooses the mix, shifts it over time, and rebalances without asking you. Check what it charges: some hold index funds underneath and charge around 0.08%, some hold the fund family's own expensive products and charge closer to 0.65%, and the difference over thirty years is not small.

Go sort your menu by expense ratio. One click, usually a column header you can tap.

Then look at where your current fund lands in that list, and whether the row four places above it owns roughly the same thing for a quarter of the price.