Print Friendly, PDF & Email

Start Here
Find Your Company’s Plan

How to make the most of your 401(k) plan


Listen to Paul’s short Introduction to this 401(k) Project.

by Paul A. Merriman 

While many Americans have individual retirement accounts (IRAs), for millions of investors the primary (and sometimes only) vehicle for retirement savings is the 401(k) or similar retirement plan. 

The Benefits of Employee Retirement Plans
• Saving is automatic with each paycheck, so investors are more likely to keep their emotions out of the decision-making process.
• Employee contributions – and the earnings in the account – are not taxed until they are withdrawn, presumably after the employee is retired and in a lower tax bracket.

  • For those with access to and choose a Roth 401(k), the earnings in the account are never taxed, and all retirement distributions are completely tax free.
  • Tax laws discourage early withdrawals; that means the money is likely to be there when it’s needed. In the best plans, employers match part or all of the employees’ contributions.

The Down Side of Employee Retirement Plans

Most 401(k) plans fall far short of their potential to help employees finance their retirement years. The two biggest problems:
1. Most plans have only limited choices of investment options.
2. Most employees don’t know how to make the best possible use of the options they have. 

To address these downsides and make the most of what is available, I offer my recommendations to assist millions of American workers and retirees invested in these plans.

Recommendations To Make The Most of Your 401(k)

The Merriman Financial Education Foundation has studied the investment options in the retirement plans offered by the U.S. federal government Thrift Saving Plan (TSP) and 100 of America’s largest corporate employers. 

For each plan, I make specific recommendations for choosing from among those options.  You will find percentage allocations for aggressive, moderate and conservative portfolios. In general, younger investors should choose more aggressive allocations, while those closer to retirement should choose more conservative allocations. 

To dig deeper on how to navigate the tradeoffs between higher returns and lower risks, here’s my favorite article on choosing the best balance of equities (stocks) and fixed income (bonds).

 These recommendations are based on my choices of asset classes, as explained in The Ultimate Buy and Hold Strategy. Every fund I recommend, in every plan, represents an asset class with a long history of successfully producing long-term returns.

 Only two of these 101 retirement plans – Shell Oil and FMR – give employees almost all the choices needed to completely follow my “ultimate” recommendations. All others fall short; many extremely short. However, we must do the best we can with the resources we have. My recommendations tell you exactly how to do that. 

Additional Investments

It’s very likely that you have, orsomeday will have,additional investments outside your employer retirement plan. The best vehicle for those investments is an IRA. In such an account, you can invest in valuable asset classes that aren’t available in your plan.

 To help investors choose where to put their extra investments I have compiled specific recommendations for Mutual Funds and ETFs available at Vanguard, Fidelity, T. Rowe Price and Charles Schwab. 

If you invest in an IRA, you may wish to use it to emphasize the asset classes in which your 401(k) plan is weak.  For example, the asset class that is likely to produce the best long-term return is small cap value. For more on this, read this article.

How To Use This List

To benefit from my recommendations, go to the list, find your plan, bookmark the page for future reference. Make note of the recommendations, and then adjust your holdings and allocate, as you deem necessary.Since I can’t know your personal financial situation, I recommend you discuss it with an investment professional. It might cost a few hundred dollars to confirm what I’m recommending, but it could produce hundreds of thousands of extra dollars in returns over the years.

You will notice than whenever possible, I recommend index funds. As I recently wrote, there are many reasons to favor these low-cost funds.  

Target-Date Funds

Another option – while not optimal but better than blindly or randomly choosing funds within a plan– is target-date retirement funds, which are offered in most retirement plans. Target-date funds offer a one-size-fits-all asset allocation based on only one data point: the approximate year of expected retirement.

These funds typically have too much emphasis on fixed-income for young investors. Worse, they offer only scant representation in the equity asset classes that have been most productive in the long run: small-cap value, large-cap value, international, emerging markets and real-estate investment trusts.

Investors willing to take the (fairly minimal) time and trouble to build a custom portfolio, instead of using target-date funds, are likely to achieve an extra one to two percentage points of long-term annual return,depending on the amount of equity in your portfolio.

Make The Maximum Contributions

In most cases, I recommend that you make the maximum regular contribution to your retirement plan, even when it pinches your current budget. I’ve never met anybody who regretted saving “more than enough” for retirement, but I’ve met many who wished they had saved more. This difference is most likely to show up when you first retire and trying to figure out how much you can afford to withdraw for living expenses. The article, accompanying tables and podcast are extremely helpful to those who are trying to figure out when they have enough to retire.

The Basis of These Recommendations

My recommendations for these plans are based on data obtained from a proprietary database compiled by BrightScope, Inc. I believe the information accurately reflects the choices available in these retirement plans. However, I cannot guarantee its accuracy, partly because the options in retirement plans can change at any time.

Stay Up-To-Date

If you are following my recommendations, be sure to subscribe to my bi-monthly email newsletter, with “sound investing” advice (articles and podcasts) as well as notifications when we discover a company has changed its investment options. Subscribers will also receive an article dedicated to putting together your best 401(k) if your company is not one of the “100” on our list. With all these resources, I hope you will overcome the drawbacks of your 401(k) plan and maximize your plan’s benefits. 

What You Can Do To Help

If you find that a fund I’ve recommended is no longer available in your plan, please email me so we can review the current options.

If you find these recommendations and educational materials valuable, please share them your fellow employees. Your word-of-mouth is essential. Take advantage and spread the word that my “How To Invest” series books are free at I encourage everyone to read “First-Time investor: Grow and Protect Your Money.”

For more information on how to get the most from your 401(k) plan, here are some good articles:

Four home runs for your 401(k) or IRA 

Four more ways to turbocharge your 401(k) 

How to Get the Most From Your 401(k) 

10 ways to turbocharge your 401(k) 

Four ways to make your 401(k) work harder 

Double your retirement income in five years