Tracks an index
The fund follows a defined benchmark according to its investment methodology. It generally seeks to track that index rather than select investments to outperform it.
401k Calculator & Guide
Index funds can provide diversified market exposure and may offer relatively low investment costs. Learn how index funds work inside a 401(k), compare stock and bond index funds, understand fees and risks, and evaluate the investment choices in your workplace plan.
Understand Index Funds → Compare Fund CostsAn index fund is an investment fund that seeks to track the performance of a specific market index. An index is a defined group of securities that represents a market, market segment, or investment category.
For example, a broad U.S. stock market index fund may hold stocks representing many U.S. companies. An international index fund may track companies outside the United States, while a bond index fund may track a market of bonds.
When your employer's 401(k) plan offers an index fund, you can generally choose it as an investment for your account, subject to the plan's rules and available options. You do not normally buy individual securities directly through the fund.
The fund follows a defined benchmark according to its investment methodology. It generally seeks to track that index rather than select investments to outperform it.
A broad index fund can provide exposure to many securities in a single investment. Diversification depends on the index and what the fund actually holds.
Many index funds have relatively low expense ratios because they follow an index, although costs vary by fund, asset class, and provider.
The investment menu in your 401(k) determines which funds you can use. Common index-fund categories include:
Track a broad segment of the U.S. stock market. Their holdings may include companies of different sizes and across multiple industries.
Track an index focused on larger publicly traded companies. A large-company index may still be concentrated in certain sectors or dominant companies.
Provide exposure to markets outside the United States. These investments can introduce currency, political, regional, and other risks.
Track a bond-market benchmark or a specific bond category. Bond funds can face interest-rate, credit, inflation, and other risks.
Focus on a narrower market segment. These may offer targeted exposure but can be more concentrated or volatile than broad-market funds.
Some target-date funds use index funds as underlying investments. They combine asset classes and adjust their allocation over time according to their glide path.
A fund's name does not tell you everything about its holdings or risks. Check the benchmark, investment objective, diversification, expenses, and official disclosures for the specific option offered by your plan.
Index funds generally seek to track an index. Actively managed funds generally use a manager's investment decisions to pursue their objective. Both approaches have costs and risks. Compare funds with similar objectives, investment exposure, fees, and relevant performance benchmarks rather than assuming one approach is always better.
The expense ratio is the annual operating expense of a fund expressed as a percentage of its assets. The expense is generally reflected in the fund's returns rather than charged as a separate bill to your checking account.
| Example expense ratio | Approximate annual cost on $10,000 | Approximate annual cost on $100,000 |
|---|---|---|
| 0.02% | $2 | $20 |
| 0.05% | $5 | $50 |
| 0.10% | $10 | $100 |
| 0.25% | $25 | $250 |
| 0.50% | $50 | $500 |
These examples assume a constant balance for one year and calculate balance × expense ratio. Actual costs change as account values change. Separate plan administration, advisory, or transaction charges may also apply.
Read more: 401(k) Expense Ratios · 401(k) Investment Fees
Compare the illustrative long-term effect of two expense ratios. This calculator assumes both funds earn the same return before fees, so it isolates the effect of the fee assumption rather than predicting which fund will perform better.
Adjust the inputs to compare the examples.
This simplified illustration compounds monthly using an annual return assumption reduced by the expense ratio. It assumes month-end contributions and excludes separate plan fees, taxes, inflation, market volatility, and differences in fund performance. Results are hypothetical, not forecasts.
Start with the investment options available in your own plan. A fund that tracks a broad stock-market index serves a different purpose from a bond index fund or a narrow sector index fund.
A diversified portfolio may combine different types of stock and bond exposure. The mix below is a conceptual illustration of how distinct categories can serve different roles; it is not a suggested allocation.
Can provide exposure to a broad portion of the domestic stock market, depending on the index tracked.
Can broaden geographic exposure, while introducing risks associated with foreign markets and currencies.
Can add a different source of investment exposure, although bond values and returns can also fluctuate.
Depending on your plan, other investment categories may be available. Review their objectives, risks, fees, and role before including them.
Some investors use a target-date fund that handles asset allocation internally. If you choose one, understand its underlying investments and glide path before adding other funds, since combining them can change your overall exposure.
Related guides: 401(k) Diversification · 401(k) Target-Date Funds · 401(k) Rebalancing
Some indexes cover only a specific sector, company size, or market segment. Review the underlying benchmark.
Two different funds may own many of the same companies. Multiple fund names do not guarantee diversification.
Past performance does not guarantee future results. Evaluate the fund's objective, costs, risks, and benchmark.
Expense ratios are not necessarily the only costs associated with your workplace retirement account.
Reacting to short-term market movements can undermine a consistent strategy. Understand your goals and risk tolerance.
Your investment selections and contribution rate are separate decisions. Review both, along with any employer match available.
Investor.gov — Mutual Funds and ETFs ↗
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U.S. Department of Labor — A Look at 401(k) Plan Fees ↗
Understand common workplace retirement plan costs and fee disclosures.
Investor.gov — Investment Products ↗
Explore investment categories and their risks.
Find official information about workplace retirement plans and applicable rules.
Index funds can be useful for gaining exposure to a defined market and may have relatively low expenses. Whether a particular fund fits depends on its benchmark, diversification, risk, cost, and role in your portfolio.
No. Index funds can lose money when the securities they hold decline. Tracking an index does not guarantee profits or protect against market losses.
Neither approach is automatically better in every situation. Index funds seek to track a benchmark, while active funds generally make investment decisions to pursue their objectives. Compare similar investment strategies, costs, risks, and performance relative to relevant benchmarks.
Costs vary by fund, index, asset class, and plan. Compare the expense ratios of similar funds and check whether other account or plan fees apply. A lower fee is one consideration, not a complete measure of suitability.
Your plan may allow you to choose multiple funds. Before doing so, understand their underlying holdings and combined exposure. Several funds can overlap substantially and may not provide as much diversification as expected.
An index fund describes an investment strategy that tracks an index. An ETF describes a fund structure whose shares trade on an exchange. Index funds can be structured as mutual funds or ETFs, but many workplace 401(k) menus offer mutual funds or other plan-specific investment vehicles instead.
Many plans allow participants to change future contribution elections and exchange existing investments, subject to plan rules and restrictions. Review your plan's procedures and the implications before making changes.
Review them periodically and when your goals, circumstances, or plan options change. Check that the investments still match your intended allocation and understand whether rebalancing is needed.
Some index funds track international stock markets, while others focus on U.S. stocks, bonds, or narrower segments. Check the benchmark and holdings to see what the specific fund includes.
Understand the funds available in your plan, compare fees, and consider how each investment fits your broader retirement goals.
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