As workplace pensions vanish from the face of the earth, many of us rely heavily on our employers' 401(k) plans to retire in comfort. The 401(k) plan has done wonders for Americans' retirement prospects, offering a tax-advantaged savings vehicle that often comes with matching contributions from our employers.
However, the 401(k) also requires you to take some responsibility for your retirement savings, and too many Americans treat it as a "set it and forget it" retirement plan. Even if you diligently save 10% or more of your salary and earn your full employer match, your 401(k) might be earning you far less than you realize.
The fact of the matter is that not all 401(k) plans are created equal, and a lackluster plan could keep you from reaching your target savings goals. Here are three telltale signs that you've been stuck with a crummy 401(k) plan -- and some steps you can take to change that.
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1. Limited investment options
According to recent data from the Investment Company Institute and BrightScope, the average 401(k) plan offers participants 25 distinct investment choices. If yours offers only a handful, then that's probably not a good sign, especially if your choices come with high fees. The average 401(k) plan's fees equal approximately 1% of assets managed, so anything above that should raise a red flag.
Of course, figuring out your plan's fees is easier said than done. While your individual investments will dictate the total amount you wind up paying in fees, as a plan participant, you're subject to certain general administrative fees as well. Fortunately, 401(k) plan providers are required to disclose their administrative fees, so check your 401(k)'s summary plan description and annual report to get a better sense of what you're paying for.
Ideally, your plan should offer a decent mix of large-cap and small-cap mutual funds, international funds, and bond funds. It should also have some low-cost index funds, which are designed to track stock market indexes like the S&P 500. Index funds offer just the right amount of market exposure and reward in exchange for relatively low administrative costs. The more investment options you have in your plan, the more you can diversify, thus increasing your chances of reaching your savings targets while mitigating your risk.
Make sure your investments are working for you -- not your plan provider. Image source: Flickr user kev-shine.
Also beware of proprietary funds, which are funds managed by your plan's provider. A good 67% of 401(k) plans included proprietary mutual funds in 2013, but these investment products represent the ultimate conflict of interest, as providers are often tempted to push their own funds even if they're not best suited to help participants meet their financial goals. If your menu of investment options is loaded with proprietary products and little else, that's a huge red flag.
2. No employer match
Employer matching contributions play a key role in helping 401(k) plan participants build their savings. But there's no law compelling companies to match employee contributions, and as such, many choose not to, leaving participants to fund their 401(k)s on their own. If your 401(k) plan is missing that employer match, meeting your savings goals will be all the more challenging.
So just how much are you missing out on if your plan doesn't come with a match? The average employer contribution for a 401(k) is estimated at 2.7% of pay. For a worker earning $50,000 a year, that's an extra $1,350 flowing into their account each year. Over the course of 15 years, assuming the 401(k) earns a conservative 6% annually, that match would amount to $33,000 in free, no-obligation money.
3. A lengthy vesting schedule
Employers don't want to give away free money for nothing; they want to incentivize their employees to stick around and drive revenue. That's a big reason why some companies impose a vesting schedule on their 401(k) matches. When you're on a vesting schedule, you need to stay with your company for a certain period of time before your employer's matching dollars are truly yours. Over 40% of 401(k) plans provide immediate vesting for matching contributions. Other companies impose vesting schedules of a year or more -- and some even make you wait five years before you can claim that money. The longer the vesting schedule, the greater the odds that you'll never see those matching dollars, which you may have been counting on to keep up with your personal savings targets.
What you can do about it
If your 401(k) plan is lousy, it pays to explore your options for finding a better one. It typically costs more money to administer a plan for a smaller business than a larger one, so you might have better luck moving to a bigger company and getting in on its 401(k) action. Not looking to jump ship? Try talking to your current employer about switching providers or changing its matching and vesting policies. Depending on your company, that may be a conversation to have with your direct boss, your HR person, or your benefits administrator.
If high fees are your plan's greatest drawback, try picking lower-cost investments to keep those expenses to a minimum. Index funds, for instance, tend to be less expensive than actively managed funds. You could also try seeing whether your 401(k) comes with a brokerage window, which allows you to choose your own investments without being limited to those offered by your plan -- though this option is best reserved for those with at least some investing experience.
Finally, if all else fails, you might consider rolling your 401(k) money into an IRA, which will typically come with far more investment options. Remember: You need that 401(k) plan to carry you through retirement, and there's no reason not to take action if yours isn't up to snuff.
