Dear Professor,

My retirement plan offers several funds to choose from, but many seem very aggressive and of limited use. One’s even an Internet fund. Overall, I don't have much confidence in them. Employees can recommend funds to add to our plan, but I'm not sure which ones to recommend. Any suggestions?Darren F.

To answer Darren's question, I went straight to the experts--Morningstar's retirement-plan consultants, who advise employers on how to put together 401(k) plans. They gave me the lowdown on which funds should go into retirement plans.

They start by whittling down the vast mutual-fund universe. To do this, they focus on Morningstar categories, which show what types of securities funds invest in. Putting together a retirement plan requires deciding which fund categories should be represented.

Read on for how to use a similar process to improve your 401(k) options. After unveiling the crucial funds for any plan, I'll show how branching out into other areas of the market can enhance a bare-bones plan and what a souped-up 401(k) plan might look like. Then I’ll tell you how to apply this new knowledge to your own plan.

The Bare Bones Options
Any retirement plan should feature at least one fund that invests in these types of securities: middle-of-the road, large U.S. stocks (which Morningstar calls large-cap blend stocks), foreign stocks, and either intermediate-term high-quality bonds or money-market securities. Here's why each is necessary.

Large-Cap Blend
I always plug these funds as the core of any portfolio. That's because the big companies with middle-of-the-road stock prices that these funds invest in are the core of the U.S. stock market. Funds that invest there provide basic access to U.S. stocks and should enable you to reap the rewards of the market's long-term strength.

Foreign Stock
While large U.S. stocks should be the foundation of your portfolio, foreign stocks can also make an important contribution. There are tons of big, well-run companies based outside of the U.S., and you don't want to miss out on the strong returns they can deliver.

Intermediate-Term Bond or Money Market
Because they don't gamble much on the direction of interest rates or buy junk bonds, intermediate-term high-quality bond funds are boring. That's precisely why they're essential. Such funds don’t gyrate as much as stock funds do, so putting some of your money into one will make your overall retirement portfolio less risky. Moderating the risk is especially important when you want to start taking money out of your portfolio.

A money-market fund plays pretty much the same role as an intermediate-term bond fund. Despite the similarities, many plans have both. That's because employers can limit their liabilities by offering at least three distinct types of investments. Most employers take that to mean stocks, bonds, and cash. In most cases, cash takes the form of a money-market fund, which should be even more sedate than most bond funds.

Beyond the Basics
When the employer sponsoring a retirement plan wants to offer more options than just the basics, Morningstar's consultants recommend refining the U.S. stock choices first.

They’d start by adding a small-cap blend offering. Because small-company stocks don't move in sync with large caps, a small-cap fund adds variety to a portfolio grounded in a large-blend fund. That could potentially boost your returns and reduce your risk.

Our consultants recommend a blend fund because rather than relying on cheap stocks (value) or pricey stocks with high potential (growth). The fund owns both--along with a host of stocks that fall in between the two extremes. (For more on what value and growth investing are all about, check out an earlier column that explains what these terms mean.)

Next, think about large-cap funds that employ varied investment styles. It's at this point that Morningstar's consultants recommend adding value and growth funds to the mix. Those allow investors to fine-tune their stock investments, giving them either a more conservative edge by putting more into value, or a more aggressive edge by using growth.

The Fully-Loaded Version
When our consultants cut loose, they suggest a host of other options. These funds aren't vital, but they add variety and can address more individual interests.

The consultants add value- and growth-oriented funds in the mid-cap and small-cap ranges, because such funds don't move in sync with their blend counterparts. Like large-value and large-growth funds, these allow investors to customize their portfolios.

Morningstar's consultants also recommend high-yield bond funds, foreign-stock funds focused on smaller companies or emerging markets, and real-estate funds (see "Branching Out with Real-Estate Funds"). Those types of securities don’t move in lockstep with large U.S. stocks, so they help balance a portfolio’s overall returns.

If our consultants’ advice looks familiar, that's because they follow the principles that are the basis of Morningstar's own 401(k) plan lineup.

What to Do
Now that I’ve spelled out what funds your plan should have, here’s what you should do:

1. Check how the funds in your plan invest and compare that with our consultants' recommendations. Find out by looking up each fund's Morningstar.com Quicktake. To see that, enter its name in the box at the top at the left column on the Morningstar.com home page. See how each fund's Morningstar category jibes with the ones our consultants suggested.

2. Examine the funds’ quality. That means looking at the category rating in the funds' Quicktakes. A rating of 3 is average, which is fine. You don't need the highest-rated funds to have a profitable retirement portfolio.

3. Uncover problems--particularly subpar choices in certain areas and no choice at all in others.

4. Start the search for additions and replacements. Use Morningstar’s Fund Analyst Picks for some tips. Here's where you can find a complete list of them . These are Morningstar analysts’ favorites in 50 different fund categories.