Many employees believe their 401(k) plans only allow mutual fund investments, but the reality is more nuanced. After examining hundreds of 401(k) plans as a financial consultant, I can tell you the investment options are evolving – and understanding what’s really available could significantly impact your retirement strategy.
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Breaking the Mutual Fund Myth
While mutual funds dominate most 401(k) menus, they’re not the only option. The Department of Labor reports that:
- 72% of 401(k) plans now offer index funds (a type of mutual fund)
- 58% include target-date funds
- 41% provide access to collective investment trusts (CITs)
- 22% offer company stock
- 15% include brokerage windows (self-directed options)
What Your 401(k) Might Actually Offer
1. Traditional Mutual Funds
Yes, these are the most common options, but they come in different flavors:
- Actively managed funds (higher fees, attempt to beat the market)
- Index funds (lower fees, track market benchmarks)
- Sector-specific funds (tech, healthcare, etc.)
- Target-date funds (automatically adjust allocations)
2. Collective Investment Trusts (CITs)
These pooled investments are similar to mutual funds but:
- Exclusively for retirement plans
- Often have lower fees (no SEC registration costs)
- Not publicly traded
- Typically available in larger company plans
Example: A S&P 500 CIT might charge 0.02% vs. 0.04% for comparable mutual fund
3. Company Stock
Many plans allow investing in:
- Your employer’s stock
- Often at a discount (10-15% lower than market price)
- But this concentrates risk – limit to <10% of portfolio
4. Stable Value Funds
These capital preservation options:
- Offer principal protection
- Provide modest returns (2-4% typically)
- Act as a bond alternative
5. Brokerage Windows (Self-Directed Options)
About 15% of large plans offer these “401(k) brokerage accounts” that allow:
- Access to individual stocks
- ETFs (exchange-traded funds)
- Bonds
- Even alternative investments in some cases
Important: These often come with additional fees and require more investor knowledge
Why This Misconception Persists
Three main reasons employees think 401(k)s only offer mutual funds:
- Plan design simplicity – Employers curate limited options to prevent decision paralysis
- Historical precedent – Mutual funds dominated early 401(k) plans
- Communication gaps – HR materials often use “mutual funds” as shorthand for all investments
How to Discover Your True 401(k) Options
- Review your plan documents (look for “investment menu”)
- Check for a “brokerage link” or “self-directed” option
- Ask HR about CITs or other non-mutual fund choices
- Look beyond the first page of your investment portal
Strategic Implications for Your Retirement
When to Stick With Mutual Funds
- If your plan offers ultra-low-cost index funds
- For hands-off investors using target-date funds
- When other options carry higher fees
When to Explore Alternatives
- If CITs are available at lower costs
- For sophisticated investors using brokerage windows
- When you need specific exposure (like company stock discounts)
Sample Allocation Using Diverse 401(k) Options
| Investment | Allocation | Type |
|---|---|---|
| S&P 500 CIT | 50% | Collective trust |
| International Index Fund | 20% | Mutual fund |
| Company Stock | 5% | Individual stock |
| Bond CIT | 20% | Collective trust |
| Brokerage Window (REIT ETF) | 5% | Self-directed |
Action Steps to Optimize Your 401(k)
- Audit your current investments – Are you using the lowest-cost options?
- Research non-mutual fund alternatives in your plan
- Consider a three-tier approach:
- Core holdings in index funds/CITs
- Satellite positions in specialized options
- Limited use of brokerage window (if available)
- Rebalance annually to maintain your target allocation
The Future of 401(k) Investments
The landscape is changing:
- More plans are adding CITs and ETFs
- Brokerage windows are becoming more common
- Private equity options are emerging in some large plans
- Crypto options are being tested (though still rare)
While mutual funds remain the workhorse of 401(k) plans, understanding your full range of options can help you build a more optimized, cost-effective retirement portfolio. The key is looking beyond the default choices and taking full advantage of what your specific plan offers.
