How to Know if Your 401(k) is Being Invested Properly

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With the possible exception of a decent health insurance plan, a good 401(k) plan, complete with an employer matching contribution, is just about the best employee benefit you can have. But 401(k) plans run the gamut from one employer to another. How do you know your 401(k) is being invested properly?

Take a Close Look at Investment Fees

Investment fees can seriously reduce your overall investment return.

Take a close look at those investment fees, as they can take the form of an annual management fee, mutual fund load fees and sometimes transaction fees.

In particular, if the load fees on your mutual funds tend to be high on all investment choices, you may be giving back too much of your investment gains to fees.

There are plenty no-load mutual funds and exchange-traded funds available, but if your own 401(k) plan favors higher load funds, your money is not being properly invested.

How Many Investment Choices are Available?

As far as investment choices go, 401(k) plans are not usually the best places to have your money — they are for taking advantage of retirement savings. If your plan has only a single choice in each category, you’re missing out on investment returns.

For example, if the plan has only a single growth stock fund, a single balanced fund, a single bond fund and a single money market fund (although that is typical), your investment options are severely limited and your plan is not being properly invested.

More investment options means greater opportunity to find better returns. If your plan is locked into a very small number of choices in each category, you’re not getting the best return on your plan.

Compare the Investment Choices to Index Funds

You should also be very interested in the performance of the funds in your 401(k) plan as they compare to the performance of related index funds.

For example, how does the performance of the plan’s growth stock funds compare with returns based on the S&Ps 500 index? If it is below, then your returns are below average. If you are also paying a load in order to be in the fund, you are being hit twice with poor performance and high fees.

Verify Your Investment Allocation

Sometimes the problem with a 401(k) plan isn’t the plan itself, but your own style as an investor. If you have too much of your 401(k) money invested in money market funds and fixed income investments, you’re probably not even outpacing inflation.

Investing for retirement requires a certain appetite for risk if it is to be successful. The problem with poor performance is that you’re not sufficiently emphasizing stocks — particularly growth stocks — into your investment mix.

When Your 401(k) isn't Being Invested Properly

Unfortunately, if your 401(k) plan is not being invested properly, your options are generally limited. But there are steps you can take to improve that performance.

Be more aggressive with your investment allocation. Since a 401(k) plan is a long-term investment plan, you should put a greater emphasis on growth investments, such as growth stocks. For most people, they should occupy the majority of a 401(k) allocation. This is especially true if you are at least 20 years away from retirement.

Contact human resources and suggest improvements. Depending upon your position in the organization, you may be able contact human resources about improving the investment choices and fee structure in the company’s 401(k) plan. If your position will not enable you to have much impact, you might be able bring the idea before an influential manager or vice president. You can consider organizing others in the company to approach HR about making improvements in the plan. If you have evidence of more competitive plans from other employers this will help. Perhaps you have plan information from a previous employer or can get it from other people, which can strengthen your case.

Start an IRA or Roth IRA, or a non-retirement investment account. If you are not optimistic about your chances of having the plan improved with your employer, you should start investing beyond your 401(k) plan. If you meet the income requirements, you can invest money in a fully deductible IRA plan. And even if you don’t meet the requirements, you can make nondeductible contributions or even consider contributing to a Roth IRA. Beyond IRA plans, you can also invest money in non-retirement investment accounts. These will not allow you to accumulate money on a tax-deferred basis but when you retire the money in the account will not be subject to income taxes. This strategy is a form of income tax diversification where retirement planning is concerned.

Look for another employer with a better 401(k) plan. This is an extreme strategy, unless the 401(k) plan is a major factor in your decision to work at one employer versus another. For some people, this is very important, even a “gut issue” that could cause the search for new job. Alternatively, if you’re sitting on the fence about your job anyway, the realization that the 401(k) plan is not what it needs to be could be another factor influencing your decision to change employers.

If you determine that your 401(k) plan is not being properly invested, take steps now to remedy the problem. Return on investment is the primary factor when it comes to any retirement plan.

It’s what enables a plan to build up quickly and to outpace inflation. If it fails in those areas, your retirement will not be nearly as golden as you may be hoping.

Have you ever done a deep analysis of your 401(k) plan to determine if it's being invested properly?

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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