3 ways to get your 401k started

By The Wall Street Journal

For 20-somethings new to 401k plans, target-date funds, which allocate investments and their corresponding risk according to your retirement date, have been an easy, hands-off choice.

But with many target-date funds taking a beating during the market collapse, some younger investors may be reconsidering the set-it-and-forget-it attitude and looking to take a more hands-on approach with their 401k plans.

"Not everybody can jump into a target-date fund and expect it to be what they need it to be," says DaRayl Davis, an investment adviser in Washington, D.C. "A target-date fund will only look at a certain time horizon, but it doesn't look at our risk tolerance in general."

For younger investors looking for more investment options, here are some alternative funds to consider:

Index funds. These low-cost funds seek to produce the same return you would get owning all the stocks in a particular stock index.

Davis says broad stock-market index funds -- which mimic, say, the Standard & Poor's 500 Index ($INX) or the Dow Jones Industrial Average ($INDU) -- are a good option for younger workers investing long term because, over the long haul, the market as a whole is likely to outperform any one individual stock or mutual fund.

And as market indexes recover from the steep slides of last year, index funds will gain value along with them.

You can diversify your risk by dividing contributions among index funds that follow riskier emerging markets and those following more-stable markets.

Balanced funds. These funds, which generally split investments 60-40 between stocks and bonds, may appeal to young investors who want to reduce the risk exposure in their 401k's. The goal of balanced funds is to avoid the sudden highs and lows of the markets and maintain steady growth. You might not be able to cash in on a hot new sector, but you won't be hit as hard if the market plummets.

"There's a danger with being too conservative, and there's a danger to being too aggressive," says Nancy L. Anderson, a financial planner in Sacramento, Calif.

Lifestyle funds. Rather than adjusting your portfolio to your estimated retirement date, lifestyle funds are built to match your risk tolerance by dividing money accordingly among stocks, bonds and money-market funds.

You should be able to choose from funds that are labeled as conservative, moderate or aggressive -- with the conservative funds more focused on bonds and the aggressive funds heavy in stocks. Some companies offer additional options like very aggressive and very conservative.

Some general wisdom: Regardless of your allocations, you should keep a close eye on your 401k and review statements each quarter to learn more about how the market works and what is happening to your money.

But try to rebalance no more than once a year -- and avoid drastic changes in response to a big market drop or rally.

"One of the mistakes people make in their 401k's is to continuously change their investments around," says Larry Rosenthal, a financial planner in the Washington, D.C., area.

It may help to sit down with a financial adviser to develop a long-term investment plan.

This article was written by Jonnelle Marte for The Wall Street Journal.