Companies today are slowly getting better at improving the quality of the retirement plans they offer to employees.  Increased options across asset classes and risk levels are becoming more prevalent.  But offering more choices doesn’t necessarily mean you’re going to choose the right ones.  How does one know what they should be putting their 401(k) money in?

It depends on such factors like your age, your appetite for risk and what types of investments you already hold.  A lot of investors will simply load up on the plan’s top performing funds.  Since past performance doesn’t really give an indication of how the fund will do in the future, there are some factors you should consider instead that actually will have an effect of the future performance of your portfolio.

One of the best ways to ensure better performance is by looking for funds with low fees.  Investing in a fund with a low expense ratio means that more of the fund’s total return ends up in your pocket instead of the fund company’s.  Also consider the fund’s Lipper rankings.  Lipper is a company that rates mutual funds against their peers and a good Lipper ranking indicates that the fund performs better than similarly managed funds.

On the more subjective side, take note of the manager’s experience.  There may not be anything wrong with a manager that’s relatively new to their post but a manager who has been around for years has experienced multiple market ups and downs and has a handle on how to react accordingly.  Additionally, look at the holdings of the funds you’re considering.  You may choose two funds that meet all of your criteria but if their top holdings and target investments are substantially the same you’ll get almost no diversification benefits from holding both.

One type of investment that is showing up more and more in retirement plans is the life cycle fund or target retirement fund.  These funds manage a portfolio of stocks, bonds and cash geared toward an individual with a specific retirement date in mind.  The fund maintains a more aggressive stock-heavy strategy the further away that retirement is and gradually rebalances to become more conservative as retirement draws near.  If you’re still unsure of what to invest in, start by looking for one of these funds and let the pros do the work for you.

Knowing exactly which funds are going to outperform in the future is nearly an impossible task but if you know what to look for to tip the scales in your favor you’ll have a much better chance at achieving a portfolio that does well.