Are you happy with your 401(k)?
OK, maybe I should be a little more specific. What I mean to ask is: Are you happy with your 401(k) plan? Do you like the funds you have to choose from? Are you OK with the fees you’re paying? Are you staring blankly at this letter thinking, ‘Oh crap, I have absolutely no clue what’s in my 401(k) plan’?
We’ll spend a little time helping you become a little more familiar with your 401(k) … and discuss the (pretty simple) way you can try to change your 401(k) if you’re not happy with it.
What is a 401(k)?
The 401(k) is a standard in retirement savings vehicles. These plans, which have been around for decades now, provide a place for workplace employees to save and invest their money, on a tax-advantaged basis, with as little friction as possible. You can contribute up to $23,000 as an employee in 2024 (up $500 from 2023) and your employer can contribute up to $46,000 for a combined total of $69,000 in total 401(k) contribution limits. (You’re unlikely to have your employer add that much, but they usually offer a match that comes in the form of either a percentage of your annual pay or flat amount.)
Some 70 million Americans participate in these plans, according to the Investment Company Institute.
But many of those account holders could afford to learn a little (or a lot) more about them.
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We’ll try to provide some of that rudimentary education today, with a big assist from Andrew Meadows (Twitter: @coolest401kguy), SVP at Ubiquity Retirement + Savings, a financial technology company that specializes in providing small business 401(k)s.
Why are 401(k) Plans Important and How Do They Work?
The 401(k) is one of the most common workplace benefits you’ll find in the U.S. Every month, an employee contributes a certain amount of their pre-tax earnings into this tax-advantaged retirement account, and sometimes an employer will chip in their own contribution. The employee can then allocate that money to the various investment options in the plan.
The 401(k) allows you to grow your savings tax-free until you reach retirement age, after which you can begin withdrawing funds (that you then pay taxes on) to finance your various needs.
401(k) plans typically allow you to invest only in mutual funds. Your options usually will include a variety of stock and bond funds, as well as “target-date funds” that invest in a combination of stock and bond funds in varying ratios that change over time as you age.
401(k) plans intentionally limit your choices to just a few funds—maybe a dozen, maybe 20, but typically not more than a couple dozen—so employees don’t get “analysis paralysis” and overthink their investment decisions. Thus, the 401(k) is a very straightforward and easy-to-understand vehicle, but it can still be intimidating if you’ve never dealt with one before.
So, let’s tackle a few questions you might have about your 401(k), including how to effect change if your 401(k) isn’t up to snuff.
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How do I learn about my 401(k) plan?
Employers are required to provide a ton of documentation to employees. The information you want will largely be found in the ‘summary plan description’ (SPD), which will usually be in a handout or on a website, which your employer will direct you to. And within the website where you make 401(k) choices such as how much to contribute or where to allocate your money, you’ll be given a list of the funds available to you, as well as hyperlinks that lead to details about each fund.
While SPDs are required, “it’s not always with the most intuitive language that a person off the street can understand,” Meadows says. “If you have more questions even after looking at the plan description and fund descriptions, consider talking to your HR representative or the plan’s advisor.”
How much am I paying for this?
“People often think ‘my 401(k) is free, it’s paid for by my employer,’ but you’re being charged fees when you’re investing,” Meadows says.
When you participate in a 401(k) plan, you’ll be charged a certain amount of basis points (a basis point is one one-hundredth of a percentage point) of your savings that’s going to pay all the people involved in managing your assets. These are people such as third-party administrators, each individual fund’s fund manager—all sorts of people get paid off of your plan.
“My best piece of advice: Look at those fee disclosures to learn how much you’re paying to save,” Meadows says. “Usually, you have to look in the last pages in the 6-point font, bottom of the prospectus, to find out how much you’re being charged.”
I’m not sure what I should invest in. What should I do?
Once upon a time, if you contributed money to a 401(k) but didn’t choose what investments you wanted, you were defaulted into a money market fund, which doesn’t really lose you money but doesn’t really give you a lot of money, either.
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“So you have people saying to themselves, ‘I’m really leaning into compound interest, but I haven’t really earned a lot of money. This 401(k) is broken!” Meadows says. “But the money market intent isn’t to make you money—it’s just there so you don’t lose it.”
Now, however, if you don’t choose any investments, you can put it into a qualified default investment account (QDIA). These can be target-date funds, but they don’t have to be. They can also be other assortments of funds that take into account factors such as an employee’s contributions, age, and/or projected retirement date.
“The whole point of these default investments is to make sure you have a better opportunity for your money to grow compared to what was traditionally offered (money market funds),” Meadows says.
QDIAs are especially helpful for younger employees, because they help put these people—who often have no investment knowledge whatsoever—into investments that set them up for success.
“If you’re young, we’re going to put you in funds that will likely gain you more money the younger you are so you can really rely on compound interest to work its magic until you get to a point where you understand investing better,” Meadows says.
WealthUp Tip: Here are some of the best Vanguard funds to buy and hold in your plan.
I have a complaint about my 401(k) options. What do I do?
Here’s some good news: The process for trying to have a change made to your 401(k) is surprisingly simple—at least on your end!
“One of the biggest questions I personally get as our company’s plan sponsor is, ‘We’ve got this fund company that has a few funds in our plan, but I read an article that this particular fund company invests in things I don’t believe in personally,” Meadows says. In those instances, employees will want to find out whether the 401(k) plan can add an ESG (environmental, social, and governance) fund.
So, to show you the steps you’d go through to make a change to your 401(k) plan, let’s use an example where you’d like to have an ESG fund added to your investment options:
- Step 1: Reach out to your human resources (HR) representative, or if your company is small enough, even directly to the head of the plan sponsor. (The plan sponsor is almost always your company, so the head would be the CEO or owner of your company.) Say, “I want an ESG fund to be added to our 401(k) plan. Can you please submit a request?”
- Step 2: The HR or the head of the plan sponsor will submit a request to the investment manager, who is in charge of deciding what funds are available in your 401(k) plan.
- Step 3: The investment manager will explore the most worthwhile options, then determine whether that fund can be added. If they can add an ESG fund, they will, and employees will be notified of the change before or when it takes effect.
And that’s it. There’s a little bureaucracy involved, but not much!
In some cases, your employer’s plan might let you sign up for a self-directed brokerage account (SDBA) directly with your custodian. So let’s say Charles Schwab or Fidelity provides your 401(k)—you might be able to contribute to a self-directed brokerage account through Charles Schwab or Fidelity instead. That’s great for investors who aren’t happy with the fund selection in their 401(k), because they’ll suddenly have access to thousands of mutual funds, ETFs, and stocks. “But there are almost too many options, so buyer beware,” Meadows adds.
Also, be aware that if you go this route, you could face higher fees.
“Your 401(k) plan tries to shield you from additional fees that you might be charged, like load fees, transaction fees, required investment minimums,” Meadows says. “When you open a self-directed brokerage account, you’re opening yourself to potentially more fees. So be aware if you’re opening this up for, say, social motivations, you could incur additional costs.”
What if I’m worried about complaining to HR about my 401(k)?
We’ll be blunt: If you have a complaint about your 401(k), there’s no guarantee that your company will do something about it—it could be that you work for a company that just doesn’t care, and if so, you’re stuck.
But many companies do care about 401(k) complaints, as they should. Because the 401(k) exists to keep you—the employee—satisfied!
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“From an HR/business perspective, I’m motivated when employees have questions about our retirement plan, because they’re actually using benefits for what they’re meant for, which is attracting and retaining talent,” Meadows says. “My responsibility is to share that with the trustee and make sure our benefits are matching the worth of our employees.”
You’ll get a really good idea of what kind of employer you have depending on their response to a 401(k) change request.
“If you ask them about your plan, and they say, ‘I don’t know, read your prospectus,’ you might not be getting good support,” Meadows says. “But if your HR person puts you in touch with the advisor directly, where you can hash it out with them, that’s a more positive sign about what kind of employer you have.”
What if I have more questions?
401(k)s might be a bland conversation topic, but you can find all sorts of financial advisors and advocates that want to discuss this important retirement vehicle with other people.
Meadows advises people to “go online, find someone who has your similar values or profile.”
“If you’re a queer person—I’m a financial person who is also a queer person, and there are thousands of others trying to help other people with similar values, in a way that imparts things about their experiences that can impact you as an investor,” he says. “For every single investor, there’s probably some sort of advisor/influencer/professional advocate who espouses your values.”
“It’s kind of difficult to say ‘go to this one website, this one source,” Meadows adds. “It’s kind of like finding a financial advisor or therapist—you need someone who can deliver a message that you will listen to.”
It’s vital to feel empowered to speak up and ask questions about your 401(k).
“The decision you make, the younger you are—the magic of compound interest could be the difference of a couple hundred thousand dollars in your retirement account,” Meadows says. “The biggest advantage you have in saving for retirement is time. The younger you are, the biggest advantage you have in getting to a dignified retirement.”
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