How to build a three-fund portfolio in your 401(k)
A three-fund portfolio holds the whole market with three broad index funds: US stocks, international stocks and US bonds. Here is how people usually put one together inside an employer plan.
1. Get your plan's fund list and fees
Every 401(k) must give participants an annual fee disclosure (often called the 404a-5 notice). It lists each fund and its expense ratio. Your provider's website usually shows the same list.
2. Find the three building blocks
- US stocks: a total market, S&P 500 or Russell 1000/3000 index fund. If the plan has an S&P 500 fund plus an "extended market" or small/mid-cap index fund, together they approximate the total US market (roughly 80/20).
- International stocks: a total international, "ACWI ex-US" or "All Cap ex-US" index fund. An EAFE fund covers developed markets only.
- Bonds: a US aggregate or total bond market index fund.
Funds labelled "collective trust" or "CIT" are often cheaper versions of familiar index funds.
3. Choose a split
The split between stocks and bonds is the main decision. People with longer time horizons often hold more stocks, but it depends on your goals and how you'd handle a large drop. International is commonly 20% to 40% of the stock portion. See example splits.
4. Fill gaps elsewhere
If your plan lacks one of the three, you can hold the missing piece in an IRA or other account and look at all accounts as one portfolio.
5. Rebalance occasionally
Once or twice a year, or when a fund drifts several points from its target, move money back to your chosen split. Changing future contributions can do much of this.
Look up your employer's plan to see which index funds its public filings show.