Long-term investing in a company 401(k) plan

Q: I recently began employment with Amazon in one of its Fulfillment Centers. I have the opportunity to participate in the company 401(k) plan, which is managed by Vanguard. I am 29 years old. The company plan offers many investment options, and I don't know which ones to choose.

I think I have a high risk tolerance. I am still relatively young and, therefore, I want to be aggressive now with the choices I make for my contributions. But I have also read that I should be looking out for fees, charges and expenses associated with investing in funds — even funds offered in 401(k) plans. The fees, they say, can 'eat away' at my investment(s).

Amazon does company matching contributions — 50 cents for every dollar I contribute, up to 4 percent of my eligible compensation in a payroll period. I am paid weekly. I plan to contribute 8 percent of my salary to the plan.

Amazon's matching contributions are initially invested in the company stock. I read that company stock is considered riskier than a stock mutual fund. Is that true?

A: Your plan compares favorably with the majority of plans available to employees. I'd call it a model plan except for one thing. Owning company stock in your company 401(k) is generally a bad idea.

So don't interpret anything I say as negative about Amazon as a company. The problem is that shares of an individual stock greatly increase the risk of your retirement account. Here's why.

Defined-contribution plans such as 401(k) plans were created to supplement or replace employer pension plans. For the most part, pensions are now being closed, and few workers your age will retire with a pension. Instead, you will have a tax-deferred savings plan, and you are responsible for all your saving and investment decisions.

How much you save and your Social Security benefits will be the source of your retirement income. That change alone is a big-time increase in risk.

The loss of pension income makes reasonable risk and stability an important part of your plan. And owning company shares isn't a reasonable risk. It will greatly increase the ups and downs of your savings because the price of a single stock is a lot more volatile than the price of a portfolio of stocks.

Finally, you don't want to hold company stock in your 401(k) plan because you can be pretty sure that if the company goes through a staff reduction, you would need to sell company shares at precisely the wrong time — when they are down.

Significantly, moving your matching contribution to a broad stock fund, such as Vanguard Institutional Index Fund or Vanguard Windsor II Fund, would be a major reduction in risk for you. But you would still have a commitment to future growth.

When in doubt, always go for the low-cost index fund. There are two reasons for this. The first is that low-cost index funds are a known advantage. The managed fund that costs nearly 1 percent a year has to overcome that added cost to keep up with an index fund.

The second is time. At 29, you have many years of saving and investing ahead of you. The fund with a hot manager today may be a source of misery (or at least disappointment) sometime over the next 40 or more years.