If the 401(k) plan you have at work isn’t as good as you think it should be, it could be worth taking up the matter with your company’s human resources department. HR might not make the ultimate decisions, but it’s the place to start.
Here’s how you can make a strong case for improving your employer’s 401(k) plan.
Key Takeaways
- If you believe your 401(k) plan at work isn’t good enough, try taking your case to your human resources or benefits department.
- You’ll be most persuasive if you can provide benchmarks showing what other employers’ 401(k) plans provide.
- Some common areas where 401(k) plans fall short are in their range of investment choices, fund performance, fees, and employer matches.
4 Ways That 401(k) Plans Sometimes Fall Short
While 401(k) plans are regulated under federal law, the employers that sponsor them also have a lot of leeway in how their plans are run. Because of that, some 401(k) plans are more generous and worker-friendly than others.
The most common complaints among 401(k) plan participants include:
- Inadequate investment choices
- Poorly performing funds
- Unnecessarily high fees
- Meager employer matches
If you believe your 401(k) is deficient on any of these scores, you’ll need to go to HR with more than just your suspicions. And if you're concerned that you don't know enough about 401(k) plans, or speak all the jargon, it would be wise to bone up beforehand. Investopedia, for example, has an entire library of 401(k) articles online. For personalized, one-on-one advice, you could consult a financial planner, some of whom will provide free advice through organizations like the Foundation for Financial Planning. Your union, if you belong to one, may have experts available. Even your employer may provide you with access to an independent financial advisor as part of your company benefits.
The most powerful way to make your case is to benchmark your 401(k) against other companies’ offerings using information that’s readily available online. Here is how to go about it.
1. Inadequate Investment Choices
The average 401(k) plan offers eight to 12 investment options, according to the Financial Industry Regulatory Authority (FINRA), a government-authorized self-regulatory agency for the securities industry. Those typically include a variety of stock and bond mutual funds. Other potential offerings: stable value funds, guaranteed investment contracts (GICs), variable annuities, and company stock.
Some plans give participants as few as three choices, FINRA says. Others offer a large (and occasionally dizzying) array of them.
Regardless of how many choices your plan offers, don’t hesitate to speak up if there are others that you wish were on the list. For example, does your 401(k) let you diversify your retirement savings outside of the United States with an international mutual fund? Are there investment options that allow you to put your money where your values are, such as a socially responsible mutual fund? Are there low-cost index funds?
If your employer doesn’t offer a particular type of investment, that could simply be an oversight. Or your employer may have made a conscious decision not to include it. By law, employers and those they hire to run their plans are considered fiduciaries. This means that they “must act solely in the financial interests of plan participants and adhere to an exacting standard of professional care,” according to the federal Employee Benefits Security Administration (EBSA). “Fiduciaries who breach those duties,” the agency adds, “are personally liable for any losses to the plan resulting from that breach.” Their fiduciary responsibility includes which investment options to provide.
This issue came to the fore in early 2022, when some investment firms began promoting cryptocurrency as a potential addition to employers’ 401(k) menus. The EBSA cautioned employers not to move too quickly, saying it had “serious concerns about the prudence of a fiduciary’s decision to expose a 401(k) plan’s participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies.” Such investments, it argued, “present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss.”
If a crypto offering is on your 401(k) wish list, you may want to wait a while before taking your case to HR.
To be properly diversified, experts generally recommend investing no more than 10% to 20% of your 401(k) in your company's stock, if that’s one of your plan’s options.
2. Poorly Performing Funds
Mutual funds can differ widely in their performance, even within similar asset groups or with similar investment strategies. To assist investors, a number of independent companies and publications rate mutual funds across various categories.
Any given fund can have good years and bad. But if you believe your 401(k) options have been consistently poor performers over time, marshal your evidence using the ratings available from online sources like Lipper, Morningstar, and Zacks.
3. Unnecessarily High Fees
Fees and performance are closely aligned. In fact, differences in fees are a major factor in why one fund’s total return may be significantly higher or lower than another's.
The fees that a particular fund charges are summed up in its expense ratio, which you can find in its prospectus and online.
Some kinds of funds charge more than others. Index funds, for example, tend to have very low expense ratios, while actively managed funds have higher ones. Domestic stock funds usually charge less than their international counterparts. But even within the same category, expense ratios can vary.
One useful way to check the funds in your 401(k) plan is to compare their expense ratios to the median for their category. The Investment Company Institute, an industry trade group, publishes median expense ratios for a number of broad categories of stock, bond, and other funds in its annual report on “Trends in the Expenses and Fees of Funds.” Bear in mind that even these median expense ratios may be slightly high. That’s because they are based on mutual funds overall, not just those purchased through 401(k) plans. And plans, because of their bargaining power, are often able to offer lower-cost institutional shares.
You can also look up the expense ratios of similar types of funds online. If your fund is significantly more expensive than others of its type, it isn’t unreasonable to ask the HR folks why.
In addition to the charges imposed by the individual investments within your 401(k), the day-to-day operation of the plan involves administrative costs—often charged by third-party companies hired to run it. Your employer may absorb some of those costs or pass them all on. By law, employers are required to provide plan participants with a detailed breakdown of those and other costs each quarter.
While it isn’t easy for employees to benchmark their plan’s administrative costs against those at other companies, the employers themselves should have access to such information. In fact, they are legally required to stay on top of it. Among their duties as fiduciaries is to closely compare the fees of different providers before choosing one. They also are supposed to continuously monitor the fees charged by the provider they chose.
4. Meager Employer Matches
Close to 50% of employers match some portion of their workers’ 401(k) contributions, according to Vanguard, which administers plans for many companies. Even among employers that offer matches, their formulas can vary widely; Vanguard counted more than 170 different formulas among the plans it runs.
The most common formula is for employers to match 50 cents per dollar of the first 6% of an employee’s pay, the equivalent of a 3% match. But some matches went as high as 7% (or as low as 1%). The median was 4%.
If your employer offers a below-average match, or none at all, you might ask HR if the company could afford to be a little more generous. To buttress your case, call their attention to a February 2022 Fidelity Investments survey. It reported that 57% of employees said they would rather have a higher company match than more time off, and 56% would take an employee match greater than 8% over working at home full time.
Do employers have to offer a 401(k) plan?
Not currently. While there have been some legislative initiatives to require most employers to provide either a 401(k) plan or an individual retirement account (IRA) for their employees, doing so is still optional.
Can you have both a 401(k) plan and a traditional pension?
Yes, although that is uncommon these days. In 2022, for example, 12% of U.S. workers in private industry had access to both types of plans, compared with 66% who had only a defined contribution plan, such as a 401(k).
What is automatic enrollment in a 401(k) plan?
Automatic enrollment gives employers the authority to defer a portion of an employee’s pay and put that money into a 401(k) account on their behalf. Employees can opt out if they wish. The SECURE 2.0 Act, signed by President Biden on Dec. 29, 2022, makes automatic enrollment (with an opt-out provision) mandatory for newly created 401(k) plans, for plan years beginning after Dec. 31, 2024.
The Bottom Line
The general trend in recent years has been for 401(k) plans to offer more investment options at lower costs. All the same, some plans may still have room to improve. If you believe your employer’s plan isn’t up to par—and if you’re comfortable doing so—consider taking your concerns to your HR department. You’ll be most persuasive if you can supply information showing what other employers are offering and, of course, raise the matter diplomatically.
In the meantime, contributing to your 401(k) plan—however imperfect it may be—is probably still worth doing. Always try to contribute enough to get the employer match, if your plan offers one. Missing out on the match is giving up free money.
In a more serious situation—such as if you believe you have been unfairly denied benefits or that your employer's 401(k) plan isn't complying with the law—you can complain to the Employee Benefits Security Administration, which is part of the U.S. Department of Labor. The law provides limited protection against retaliation by an employer in such cases, but you can request confidentiality.
