Ah, the joys of the 401(k) plan! It's a seemingly easy solution to your retirement needs. Just sign up once, then conveniently contribute automatically every month. Better yet, your contributions are all made with pre-tax dollars, lowering your eventual tax bill. What's not to love?

As it turns out, quite a lot.

The cons of 401(k)s
First, many plans come with high costs. The typical stock mutual fund charges 1% -- maybe a little more -- in annual fees. But many 401(k) plans are full of fund options that cost considerably more than that. And if they employ outside advisors, you might be socked with an additional fee of 2% or more. If you've got $200,000 in your account, you might be forking over $6,000 or more in fees each year!

Next, many plan participants make poor investment choices with their money, hampering their ability to grow their nest eggs. Worse yet, many 401(k) plans don't offer participants good choices to begin with. While it's true that most mutual funds don't perform as well as simple and inexpensive broad-market index funds, there are some good performers out there. Alas, you won't always find these winners in your plan's roster of available funds:


Expense Ratio

10-Year avg. Ann. Return

Holdings Include

Yacktman (YACKX)



Loews (NYSE:L), Disney (NYSE:DIS), H&R Block

T. Rowe Price Health Sciences (PRHSX)



Celgene (NASDAQ:CELG), Express Scripts (NASDAQ:ESRX), Teva Pharmaceutical (NASDAQ:TEVA)

FPA Crescent (FPACX)



eBay (NASDAQ:EBAY), Health Net, Ensco International (NYSE:ESV)

Data: Morningstar.

Unfortunately, few 401(k) plans give you access to any fund you want. More often, you're stuck with what your employer gives you.

Set it and forget it? Not so fast
In addition, our 401(k) plans offer many of us a false sense of security. They could provide for all of our needs in retirement, but according to Fidelity Investments, the average account balance at the end of the third quarter of 2009 was just $60,700. If you retire with that and withdraw 4% of it yearly, as our Rule Your Retirement newsletter recommends, you'll be living on $2,428 yearly, or about $200 per month. Yikes.

Even if you retire with 10 times that, $607,000, you'll get $24,280 in your first year. That's not much, especially with many living expenses rising.

Finally, 401(k) plans leave investors at the whim of the market. You may do everything right -- saving what seems like enough, investing it effectively, and not withdrawing from your 401(k) account when you change jobs or need a loan. But if you don't invest well, a bad market can ruin all your plans. If you retired in 2007 with $1 million, but kept that nest egg in stocks, you'd have been sitting on a much smaller sum a year later.

In 401(k)s we (only sort of) trust
You still should save aggressively and investing effectively -- just remember that the market offers no guarantees. Over the long haul it will likely grow significantly, but from year to year, it's anyone's guess. If some of this doesn't seem fair, I agree with you. Congress has been considering reforms, but Fools shouldn't expect strong measures soon.

In the meantime, you can take steps to make the most of your 401(k) plan. Review your investments to make sure you're getting the highest long-term average return at the lowest annual fees. Even without any major change in the structure of 401(k)s, you can still find ways to get greater benefits out of your plan -- no matter how bad it may be.

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