What You Can Do About a Lousy 401(k) Plan

Jason Stipp: I'm Jason Stipp for Morningstar. For most investors, the 401(k) will play a big role in their retirement plan, but what if your company's plan is not up to snuff?

Here with some tips on how to lobby for a better 401(k) is Christine Benz, our director of personal finance.

Christine, thanks for joining me.

Christine Benz: Jason, it's great to be here.

Stipp: What are some some of the issues that you would want to complain about as a 401(k) plan participant?

Benz: I recently wrote an article where I prepared a checklist that 401(k) participants can use to assess the quality of their 401(k) plans. I'd focus on four key areas.

The first one is the fees. 401(k) participants can pay a couple of different types of fees. One is the fund fees--and those are something that every 401(k) participant pays--but also there may be administrative costs associated with participating in the plan. In some cases, employers may pick up those costs on behalf of employees. In other cases, employees may pay them either directly or they may be embedded in the fund fees. So, you need to do a little bit of sleuthing.

The interesting thing--and one reason that I would say focus on fund fees or total plan fees--is that it's easy to quantify. If it looks like your plan is costly, it's easy to say, we think we can find cheaper fund options. We think that our administrative costs are above average.

You also want to focus on the investment lineup's quality as well as its breadth. In terms of assessing quality, you can use Morningstar.com to research the individual fund offerings. You can also assess breadth just by thinking about the basic building blocks that everyone should have in their portfolio regardless of life stage: core U.S. equity, core foreign equity, and great fixed-income options. Those are the key things I would look for in terms of assessing breadth.

You also want to look at matching contributions. Look at whether your company's matching scheme is in line, or maybe better than or worse than, the prevailing norms. The most recently available figures on 401(k) matching schemes showed that $0.50 on every dollar contributed up to 6% of salary was a common matching setup. So you can use that as a benchmark when assessing your company's matching contributions.

Finally, you want to look at the other features that go along with the plan. A biggie these days is the Roth 401(k). Roughly half of employers now do offer Roth 401(k) contributions. That might be something to consider, particularly if you're a young employee. You'd want to take advantage of making those aftertax contributions in exchange for tax-free withdrawals down the line. Look for that Roth feature.

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You may also want to look at some of the other features that behavioral economists say are good options for 401(k) participants. That would be auto-enrollment, which tends to get people on board and they stay on board. Auto-escalation is another nice feature that a lot of plans have added; that means that when employees get raises, their 401(k) contributions get bumped up a little bit. And automatic rebalancing is another feature--more in the category of nice to have--but it is one of those things that helps people stay on board with the plan and helps keep their asset allocations in line.

Those are some of the things I would take stock of before I decide to complain. Do that due diligence to confirm where your plan stands relative to other companies.

Stipp: Let's say I look up my funds on Morningstar.com, and I see their expenses are above the category average, for instance. I can see that on Morningstar.com. Or some of the fund options don't seem to be highly rated, or there's no company match. Let's say some of these things, a combination of them, are present. What should I do next?

Benz: A great next step is to put this all in writing. Of course, you don't want to be overly contentious or adversarial, because you want to get your message across. The best thing to do is to do your research and let the statistics do the heavy lifting. Document this in an email, or in another document, and pass it on to the appropriate party within your company. Be explicit about what the issues are, rather than just saying, I think we have a lousy plan or I think that the company is being cheap in terms of its matching contributions. Spend some time researching and benchmarking.

Also know that if you work for a smaller employer, unfortunately higher fees may be a fact of life. Smaller employers don't have the clout that larger employers with many millions of dollars in their 401(k) plans have. I'm not saying that people who work for smaller employer should necessarily settle, but they may unfortunately have to contend with, put up with, higher costs.

Stipp: You mentioned HR. Are they generally the folks who are responsible for the 401(k) plan at a company?

Benz: It really depends on the company. It depends on the company size. At smaller companies it might be someone in HR; it might be the director of finance, who has spearheaded working on the 401(k) plan. If you work for a larger employer, there is a good bet that there's a 401(k) committee in place--people who are charged with making sure that the plan is as good as it can be given the assets that are available in the plan.

If you have a 401(k) committee in place, preparing a document with explicit details would be the best avenue for directing that communication to them.

Stipp: Prepare the document, find the right folks to send it to. What's next?

Benz: Ideally you would have an opportunity to sit down with the decision-makers. If you were able to express what your issues are and have a little bit of back and forth, you may get some background on why your plan looks the way it does. It may turn out that the people in charge of your 401(k) have put a lot of time and thought into trying to keep those costs down, and it's the best that they can do, given the assets in the plan.

Ideally you would have some type of a dialogue about your issues and about what's going on with the plan from the organizers' perspective. If you don't get anywhere in terms of improving the plan, come back at it after a period of time. Do your research again. If you're still dissatisfied with the plan, wait a little while and then level your criticisms again. You may also be able to find some like-minded allies in the company who are willing to sign your letter and say that they, too, share your issues and concerns with the plan. So don't let it lie.

But if, after a period of time, you have not been able to improve the plan, your best option is to just invest enough inside the plan to earn any 401(k) matching contributions, then go outside the plan to an IRA, where you can invest in almost anything that you want. And then if you have additional retirement assets to invest, you may want to go back to the plan. But only after you've explored the IRA option.

Stipp: We do know that more and more investors will be relying on 401(k) plans for their retirement or a piece of their retirement. Thanks for these tips on making them the best they can be.

Benz: Jason, great to be here.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.