How to choose a good 401(k) investment option?
There are not as many options here as you fear. If you have no other investments outside this 401K it is even easier. Outside accounts include IRA, Roth IRA, taxable investments (mutual funds, ETF, individual stocks), Employee stock purchase plans. Amount: make sure you put enough in to get all the company match. I assume that in your case the 9% will do so, but check your documents. The company match will be with pre-tax funds.  Roth vs Regular 401K? Most people in their lifetime will need a mix of Roth and Regular retirement accounts. You need to determine if it is better for you to pay the tax on your contributions now or later. Which accounts? If you are going to invest in a target date fund, you can ignore the rest of the options. The target date fund is a mixture of investments that will change over the decades. Calculate which one fits your expected retirement date and go with it. If you want to be able to control the mix, then you will need to pick several funds. The selection depends on what non-401K investments you have. Now here is what I considered the best advice.  Decide Roth or regular, and just put the money into the most appropriate target date fund with the Roth/regular split you want. Then after the money starts flowing into your account, research the funds involved, the fees for those funds, and how you want to invest. Then move the money into the funds you want. Don't waste another day deciding how to invest. Just get started. The best part of a 401K, besides the match, is that you can move money between funds without worrying about taxes. If you realize that you want to put extra emphasis on the foreign stocks, or Mid-cap; just move the funds and redirect future contributions. "The vanguard funds are all low fee your employer has done a good job selecting their provider for 401(k).  I would do a roth if you can afford it as taxes are at a historical low.   Just pick the year you want to get your money if you will need your money in 2040 pick  Vanguard Target Retirement 2040 Fund. Its that simple. This is not a ""thing"" ( low-risk, and a decent return ).  Risk and reward are correlated.   Get the vanguard and every year it rebalances so that you take less risk every year. Lastly listen to the Clark Howard podcast if you are having trouble making decisions or contact their 45 hour a week free advice email/phone help." Great question and good for you for starting investments.  Are you young, like in your 20s? I would do all that you can in the ROTH.  You will not get a tax break now, but you will get one later.  Keep in mind that any company match does not go into ROTH but the IRA. I try to look at two things when judging a mutual fund:  the historic performance, and the expense fee.  When comparing two funds, if one has a 10% average return for 10 years, and a 1% fee, I feel it is better than a fund that has a 12% return for the same time period and a 3% fee.   If they are close, you can always put a little bit in each one.   An important question to ask is if you have debt.  You may want to scale back your contributions some to pay down that debt.  For me, I don't like to go below a company match to do so, but anything over and above might be better utilized to move that student, car or credit card loan to zero.  Others might disagree, so YMMV, but I have done this myself. "There are a lot of funds that exist only to feed people's belief that existing funds are not diversified or specialized enough.  That's why you have so many options. Just choose the ones with the lowest fees. I'd suggest the following: I wouldn't mess around with funds that try and specialize in ""value"" or those target date funds. If you really don't want to think and don't mind paying slightly higher fees, just pick the target date fund that corresponds to when you will retire and put all your money there. On the traditional/Roth question, if your tax bracket will be higher when you retire than it is now (unlikely), choose Roth.  Otherwise choose traditional." I agree with the others that the ROTH is probably better. See this list of benefit/cost comparison (as opposed to rule differences)http://en.wikipedia.org/w/index.php?title=Comparison_of_401%28k%29_and_IRA_accounts&oldid=582368417
"Aside from employer 401(k) matches (which may double your money immediately), paying off debts is almost always the best place to start. Paying off a debt early is a zero-risk operation and will earn you N% (where N is your interest rate). Is that a good deal for a zero-risk return? The closest equivalent today (Aug 24, 2012) is that you can earn about 2.68% on 10-year Treasury bonds. Unless you have a really, really good interest rate (or the interest is tax-deductible), paying off your loan will offer an excellent risk-adjusted return, so you should do that. The ""really good"" interest rate is typically a mortgage or student loans. (Mortgage interest is also tax-deductible, at least for now.) In those cases, you're not going to gain nearly as much by paying the loan early, and the loan is large - larger than the amount you want to have in risk-free investments. You want to invest for returns, as well! So you can save for retirement instead (in a 401(k) or similar account) and take on a little risk." "Will it be more money for me now if I don't take it out? Yes Will it be more money for for my retirement if I do? Yes The difference will be the existence of a match and tax-deferral.  If there is a match then you will have an instant 100% gain on the amount that is matched. From a tax standpoint, putting some in your 401(k) now will reduce your taxes this year - you will instead pay tax when you withdraw the money at retirement (the withdrawal will be considered ""income"" at that time). Other decision points: If there is no match, but you still want to add to retirement savings, then you could alternatively put the money in an IRA, which will give you more control over your investments than a 401(k) (which could be good or bad, depending on how investment savvy you are)." "In your situation, you probably should not cash in your IRA and 401(k). A good mortgage lender will want to see that you have ""reserves"" -- money that you could fall back on if you hit a very rough patch.  Your current savings and retirement accounts might add up to a suitable reserve. You might want to do something like this instead: By the way, instead of cashing in a 401(k), it is usually better to: This method avoids large tax penalties, and encourages you to rebuild your 401(k).  Unfortunately, your large debt balances might prevent you from getting the PLOC.  But even in the worst case scenario (where you cannot use a PLOC to pay off a 401(k) balloon payment), it postpones the tax hit until after the balloon payment." Yes, you may make non-deductible contributions to an IRA. The main benefit of a non-deductible IRA is tax-deferred earnings. If the investment pays out dividends, they will be kept in the IRA (whether you take them in cash and put them in a Cash Management Account, or you automatically reinvest them). You do not get taxed on these earnings until you withdraw from the IRA during retirement. If your income at that time is significantly lower than your income while you're working, you will be in a lower tax bracket (unless tax rates change drastically between now and then), so the taxes you pay on these earnings will be lower than if you'd invested outside the IRA and paid taxes along the way. You also get the benefit of compounding of the tax-deferred earnings. There's one caveat -- when you withdraw from the IRA, all the growth is treated as ordinary income. Even if some of it is capital gains, it will be taxed at your ordinary income rate, not your capital gains rate. So this is most beneficial for investments that produce dividends.  If you have a mix of deductible and non-deductible contributions to your IRA, the tax on the principle portion of your withdrawals is pro-rated based on the ratio of deductible to total contributions. This ensures that you eventually get taxed for the deductible portion (it's not really tax-free, it's tax-deferred), but don't get taxed twice for the non-deductible portion. Another option, if your 401(k) plan allows it, is to make after-tax contributions to the 401(k). At the end of the year, you can make an in-service distribution of these contributions and their earnings from the 401(k) to a Roth Conversion IRA. This allows you to contribute to a Roth IRA even if you're above the income limit for normal Roth IRA contributions. You can also do this even if you're also making non-deductible contributions to your regular IRA. "An investment portfolio is typically divided into three components: All three of those can be accessed through mutual funds or ETFs. A 401(k) will probably have a small set of mutual funds for you to pick from. Mutual funds may charge you silly expenses if you pick a bad one. Look at the prospectus for the expense ratio. If it's over 1% you're definitely paying too much. If it's over 0.5% you're probably paying too much. If it's less than 0.1% you have a really good deal. US stocks are generally the core holding until you move into retirement (or get close to spending the money on something else if it's not invested for retirement). International stocks are riskier than US stocks, but provide opportunity for diversification and better returns than the US stocks. Bonds, or fixed-income investments, are generally very safe, but have limited opportunities for returns. They tend to do better when stocks are doing poorly. When you've got a while to invest, you should be looking at riskier investments; when you don't, you should be looking for safer investments. A quick (and rough) rule of thumb is that ""your age should match the portion of your portfolio in bonds"". So if you're 50 years old and approaching retirement in 15 years or so, you should have about 50% in bonds. Roughly.  People whose employment and future income is particularly tied to one sector of the market would also do well to avoid investing there, because they already are at risk if it performs badly. For instance, if you work in the technology sector, loading up on tech stocks is extra risky: if there's a big bust, you're not just out of a job, your portfolio is dead as well. More exotic options are available to diversify a portfolio: While many portfolios could benefit from these sorts of holdings, they come with their own advantages and disadvantages and should be researched carefully before taking a significant stake in them." Ending up with nothing is an unlikely situation unless you invest 100% in a company stock and the company goes under. In order to give you a good answer we need to see what options your employer gives for 401k investments. The best advice would be to take a list of all options that your employer allows and talk with a financial advisor. Here are a few options that you may or may not have as an option from an employer: Definitions from wikipedia: A target-date fund – also known as a lifecycle, dynamic-risk or age-based fund – is a collective investment scheme, usually a mutual fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches. An index fund or index tracker is a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market... An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks.[1] An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. The capital stock (or stock) of an incorporated business constitutes the equity stake of its owners. Which one can you lose everything in? You can lose everything in stocks by the company going under. In Index funds the entire market that it follows would have to collapse. The chances are slim here since the index made up of several companies. The S&P 500 is made up of 500 leading companies publicly traded in the U.S.  A Pacific-Europe index such as MSCI EAFE Index is made up of 907 companies. The chances of losing everything in an ETF are also slim. The ETF that follows the S&P 500 is made up of 500 companies. An Pacific-Europe ETF such as MSCI EAFE ETF is made up of 871 companies. Target date funds are also slim to lose everything. Target date funds are made up of several companies like indexes and etfs and also mix in bonds and other investments depending on your age. What would I recommend? I would recommend the Index funds and/or ETFs that have the lowest fee that make up the following strategy for your age: Why Not Target Date Funds or Stocks? Target date funds have high fees. Later in life when you are closer to retirement you may want to add bonds to your portfolio. At that time if this is the only option to add bonds then you can change your elections. Stocks are too risky for you with your current knowledge. If your company matches by buying their stock you may want to consider reallocating that stock at certain points to your Index funds or ETFs. "Your initial plan (of minimizing your interest rate, and taking advantage of the 401(k) match) makes sense, except I would put the 401(k) money in a very low risk investment (such as a money market fund) while the stock market seems to be in a bear market.  How to decide when the stock market is in a bear market is a separate question. You earn a 100% return immediately on money that receives the company match -- provided that you stay at the company long enough for the company match to ""vest"".  This immediate 100% return far exceeds the 3.25% return by paying down debt. As long as it makes sense to keep your retirement funds in low-risk, low-return investments, it makes more sense to use your remaining free cash flow to pay down debts than to save extra money in retirement funds. After setting aside the 6% of your income that is eligible for the company match, you should be able to rapidly pay down your debts.  This will make it far easier for you to qualify for a mortgage later on.  Also, if you can pay off your debt in a couple years, you will minimize your risk from the proposed variable rate.  First, there will be fewer chances for the rate to go up.  Second, even if the rate does go up, you will not owe the money very long." "Here is the ""investing for retirement"" theoretical background you should have. You should base your investment decisions not simply on the historical return of the fund, but on its potential for future returns and its risk. Past performance does not indicate future results: the past performance is frequently at its best the moment before the bubble pops. While no one knows the specifics of future returns, there are a few types of assets that it's (relatively) safe to make blanket statements about: The future returns of your portfolio will primarily be determined by your asset allocation . The general rules look like: There are a variety of guides out there to help decide your asset allocation and tell you specifically what to do. The other thing that you should consider is the cost of your funds. While it's easy to get lucky enough to make a mutual fund outperform the market in the short term, it's very hard to keep that up for decades on end. Moreover, chasing performance is risky, and expensive. So look at your fund information and locate the expense ratio. If the fund's expense ratio is 1%, that's super-expensive (the stock market's annualized real rate of return is about 4%, so that could be a quarter of your returns). All else being equal, choose the cheap index fund (with an expense ratio closer to 0.1%). Many 401(k) providers only have expensive mutual funds. This is because you're trapped and can't switch to a cheaper fund, so they're free to take lots of your money. If this is the case, deal with it in the short term for the tax benefits, then open a specific type of account called a ""rollover IRA"" when you change jobs, and move your assets there. Or, if your savings are small enough, just open an IRA (a ""traditional IRA"" or ""Roth IRA"") and use those instead. (Or, yell at your HR department, in the event that you think that'll actually accomplish anything.)"