Yesterday, I mentioned asset allocation. Today a definition.
Asset allocation basically refers to where and how you invest you money. It's important to have the right allocation in a 401(k) because that will determine how well you take advantage of the
There are all kinds of investments and asset categories, but to keep it simple, I'll just divide them into two: those that are more aggressive we'll call "growth" and less aggressive we'll call "safety".
As a general rule, money you'll need soon should be in a 'safety' vehicle. An example is a bank savings account. Money there is insured and easy to access. On the other hand you won't earn much interest on it. It's only there for safe keeping.
In a 401(k), the less time you have left before retirement, the safer you want your money to be. Shifting your asset allocation toward things like bonds or money market funds makes sense. (Your plan's manager will likely use a term like "capital preservation" or "liquidity" to describe this asset class). Those are relatively low-risk investments that generate little return but also have little risk for losing any of what you've saved up.
On the flipside, if you're in your 20s, 30s or early 40s, you should be more aggressive by investing in growth assets. Stocks, international funds and the like carry more risk than safe investments, but come with bigger potential rewards. Your 401(k) manager will likely refer to these as "growth" or "aggressive growth" vehicles. Since you won't be touching the money for 20 years or more, you have time to make up any losses.
If all that still sounds like jibberish, the investment manager of your 401(k) should have an easy answer for you. Call them up and ask if they have pre-allocated portfolios set up based on the year you're supposed to retire. Most plans do this. If you don't know anything about how to invest your money, at least you know your age; someone who's 25 today would reach retirement around the year 2049, so they could simply ask their plan's manager if there is a portfolio pegged to that year, and allocate most, if not all, of their money in that.
Up tomorrow: why now is the absolute, positive best time to be putting money into a 401(k).