Man who is reviewing his retirement investment options.

What's in my retirement plan?

Maybe you’ve got a retirement plan through your work. Maybe you’ve got an individual retirement account, or IRA (or you’re thinking about starting one). Either way, you’ve probably got some choices to make about your retirement investments—and that can be intimidating if you’re not sure what all the options are or what they’re supposed to do. Here’s a quick primer on the basics of retirement investment options.

Why are there multiple investment options in my retirement plan?

Graphic of a quote from the article saying, your employer picked enough investment options so you would have the flexibility to build a diverse portfolio for your specific needs.

Having multiple options helps you customize the mix of investments in your retirement plan.

With retirement accounts at work, your employer selected the menu of investment options in the plan. Because most retirement goals are unique, your employer picked enough investment options so you would have the flexibility to build a diverse portfolio for your specific needs.

In an IRA, the IRA provider picks the options with the same goal in mind. Your role is to consider your retirement goals, your current situation, your investor profile, and your time until retirement—then select a mix of investments that can help meet your goals.

What makes up the options?

Graphic of a quote from the article saying, the most common investment vehicles are mutual funds, exchange-traded funds, and collective investment trusts.

It would be overwhelming to most people to have to pick every stock or bond in their retirement account. Most options available through your retirement plan or IRA will be investment vehicles that help make investing easier for you.

The most common investment vehicles are mutual funds, exchange-traded funds (ETFs), and collective investment trusts. They allow you to pool money with a lot of other investors, and then a professional manager for each investment does the actual investing based on your elections.

Think of an investment vehicle like an actual vehicle, the bus of investing. You don’t have to worry about “driving” the fund ... that is, picking each underlying investment of the fund. You pick the fund or various funds from different asset classes you want, then decide when and where to get on. A professional fund manager for each investment option takes care of the driving by selecting all the investments that go in the applicable fund.

The other choice you may see in your plan’s investment options is the selection between active and passive. With actively managed funds, a professional manager is selecting investments to attempt to outperform a benchmark (like the S&P 500). Think of it like a bus driver who’s constantly seeking quicker, better routes. With passively managed funds (often called “index funds”), a manager is just trying to replicate the returns of the index, like a bus driver following an established route.

What types of investment options are there?

Graphic of a quote from the article saying, the investments in your 401k typically center around 2 types of asset classes: equities and fixed income.

There are a lot of different investment options with a lot of different objectives. But the investments in a 401(k) or IRA typically center around 2 types of asset classes: equities and fixed income.

Fixed income funds are like the foundation of a retirement plan. Fixed income options will often have names with words like “bond fund.” These are made up of bonds and other investment instruments that generally provide income in the form of regular interest payments. Fixed income options tend to be less volatile than equity options because the bonds and other instruments often have more certainty attached to them. When an investor buys a bond, she knows what she’ll be getting paid in interest over the life of the bond, and she knows when her invested capital will be returned. Fixed income investments usually play a role in diversifying a portfolio to provide more stability over time.

Equity funds are made up of company stock shares. When you own stock, you own a little piece of a company and are entitled to a share of their profits. While some equity shares may provide regular income from dividend payments, most investors use equities with the hope that their prices will go up over time. That’s why equities are often considered the growth engine of an investment portfolio. But growth comes with uncertainty. It’s because of this uncertainty that equity returns tend to be more volatile than fixed income options. As you get closer to retirement, you may shift toward more fixed income options if you’re less comfortable with market volatility.

When you’re selecting and combining the mix of investments from various asset classes in your retirement account, it’s called asset allocation, and it’s how you add diversity to your investment mix.

What if I don’t want to pick the investment options?

Graphic of a quote from the article saying, many employers offer investments that allow you to pick a portfolio based on your age or by how much risk you want to take.

If selecting investment options isn’t your thing, no problem. Many employer plans and IRAs offer investments that allow you to pick a portfolio based on your age or by how much risk you want to take. These work like the equity and fixed income investment options, but go one step further.

In a target date fund, the manager starts with a future date which may align with when you think you’ll retire. The manager puts together a portfolio of equity, fixed income, and other investments that are appropriate for goals they’ve established for each portfolio in the series. As time passes, the manager adjusts the mix of investments to recognize that the investors that typically select this portfolio are getting older and likely less tolerant of risk.

Target risk funds are similar in that they have a mix of investments that are associated with a specific risk category. Instead of getting generally more conservative as a target date nears, the target risk funds stay true to a specific risk level. You may want to change your selection of this type of investment as your appetite for risk changes over time.

With both target date and target risk funds, you can check in regularly and when you have significant life events to see how you’re doing.

While these types of funds take most of the hard work out of retirement investing, they may not be the right fit for someone who wants a more personalized portfolio or someone who wants to be very active with managing their investments. You could choose to work with a financial professional, robo-advisor, or other asset manager to get a customized investment mix tailored to your financial goals. You can also choose to select and monitor the investments on your own.

Next steps:

  • Log into your service provider’s website and review your current selections and all the options. Including what income and equity fund options they offer, examine the descriptions; they’ll tell you what the fund managers are trying to accomplish. (If you have a retirement account with Principal, log in to review your investments.)
  • Connect with your financial professional to see if you should make any changes to your investment mix based on your goals or your current situation.
  • Learn if a robo-advisor may be a good fit for your financial situation.
  • Haven’t started saving for retirement yet? Talk to your employer about enrolling in the 401(k) plan. If you’re thinking about an IRA, here are 3 steps to start one.

About target date funds

Target date portfolios are managed toward a particular target date, or the approximate date the investor is expected to start withdrawing money from the portfolio. As each target date portfolio approaches its target date, the investment mix becomes more conservative by increasing exposure to generally more conservative investments and reducing exposure to typically more aggressive investments. Neither the principal nor the underlying assets of target date portfolios are guaranteed at any time, including the target date. Investment risk remains at all times. Asset allocation and diversification do not ensure a profit or protect against a loss. Be sure to see the relevant prospectus or offering document for full discussion of a target date investment option including determination of when the portfolio achieves its most conservative allocation. 

Investing involves risk, including possible loss of principal.

Asset allocation and diversification does not ensure a profit or protect against a loss. Additionally, there is no guarantee this investment option will provide adequate income at or through retirement. Equity investment options involve greater risk, including heightened volatility, than fixed-income investment options. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. These risks are magnified in emerging markets.

There is no guarantee that a target date investment will provide adequate income at or through retirement. Participants may also choose a portfolio with a target date that does not match the intended retirement date. Compare the different portfolios to see how the mix of investments might shift.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Co. Securities offered through Principal Securities, Inc., 800-547-7754, member SIPC and/or independent broker-dealers. Principal Life, and Principal Securities are members of the Principal Financial Group®, Des Moines, Iowa 50392. Certain investment options and contract riders may not be available in all states or U.S. commonwealths.