When you land a new job, one of the biggest financial perks often offered is a 401k. But then comes the hard part: how to pick investments in your 401k.

With a menu of funds, risk levels, and jargon-filled descriptions, it can feel overwhelming. Do you pick the fund with the best historical returns? Do you try to diversify across everything offered? Or do you just guess and hope for the best?

The good news is it doesn’t have to be complicated. By focusing on a few core principles and listening to the wisdom of experienced financial voices, you can simplify your choices and feel confident about your retirement savings.

What is a 401k and Why It Matters

At its core, a 401k is an employer-sponsored retirement plan. As Zina Kumok, financial advisor at CH Douglas and Gray Wealth Management, explains, “A 401k is basically a retirement plan you can only access if you’re employed by a company that offers one to you. The annual contribution limit is really high compared to an IRA, which is especially helpful if you’re behind on retirement savings or want to retire early.”

That high contribution limit means you can stash away more money each year, all while getting potential tax advantages.

The Importance of Employer Matches

Another huge perk of a 401k is the employer match.

Zina shared, “The company wants you to contribute to the 401k, and they’ll offer an incentive. For every dollar you put in, they might put in 50 cents or even a dollar up to a limit. That’s free money.”

Skipping the match is like saying no to part of your salary. At my last corporate job, the match added around $3,000 per year to my account. That money compounded into nearly $200,000 over time, all because I automated the process and let the market work.

Choosing Investments in Your 401k

This is where many people freeze up. Fortunately, JL Collins, author of The Simple Path to Wealth, has a simple answer: “You can sweep all the complicated stuff off the table. All you need are broad-based, low-cost index funds. My preference is a total stock market index fund, but if your 401k only offers an S&P 500 index fund, that’s fine too. These are the simplest, least expensive, and most powerful tools to build wealth.”

Why? Because actively managed funds rarely beat the market in the long run. Less than 1% outperform the S&P 500 over 30 years.

By sticking with a simple index fund, you’re harnessing the market’s long-term power. Over the past 50 years, the S&P 500 has returned about 12% annually. That’s incredible growth, especially if you start young and stay consistent.

Here's my full interview with JL Collins on this subject.

Risk Tolerance, Diversification, and Time Horizon

Here’s how I personally think about 401k investing. In my 30s and 40s, I’m all about 100% equities. That means putting everything into stock funds for maximum long-term growth.

Once I hit my mid-50s, I’ll start introducing bonds into my portfolio to smooth out the ride. My eventual target is around 65% equities and 35% bonds in retirement.

That’s my philosophy today, not a recommendation. If 100% stocks feels like too much of a rollercoaster for you, introduce bonds earlier. Just remember that history shows bear markets are shorter than bull markets, and over time, stocks have been the best way to build wealth.

Automating Your 401k Contributions

Another reason 401ks are so powerful is the automation.

Zina put it well: “Once that money is out of your paycheck, it’s not hitting your bank account — and that makes all the difference. There’s friction to stopping contributions, so most people just let it keep going. That’s how you build wealth without even noticing.”

I’ve seen this in my own life. By maxing out my 401k during my corporate years, I ended up with hundreds of thousands of dollars without constantly worrying about it. Set it and forget it works.

Alternatives to Your 401k

What if you don’t have a 401k, or you’ve maxed it out? That’s where other accounts come in.

As Joe Saul-Sehy, co-host of Stacking Benjamins, explains, “Start with your 401k up to the match, then max out your HSA, and then go back to your 401k. HSAs are phenomenal because they’re triple tax-advantaged: money goes in pre-tax, grows tax-free, and comes out tax-free for medical expenses. And after age 65, you can use it like a retirement account.”

Other options include IRAs and taxable brokerage accounts. These give you flexibility, especially if you’re aiming for early retirement.

Dive deeper with my full interview with Joe Saul-Sehy on how your workplace benefits can make you a millionaire.

Final Thoughts

Learning how to pick investments in your 401k doesn’t need to be overwhelming. Focus on a few key steps: take advantage of your employer match, choose simple low-cost index funds, stay aggressive when you’re young and then slowly add bonds later in life, automate your contributions so saving becomes effortless, and explore HSAs, IRAs, and taxable accounts as complements to your 401k.

The simpler you keep it, the more likely you are to stay the course and let compound growth work its magic.

If you’d like more strategies for building wealth and designing a life you love, check out my book, Own Your Time.