5 Simple Ways to Boost an Underperforming 401(k)


There are about 52 million Americans saving up for retirement using a 401(k). While this is an impressive number, it doesn't tell the full picture of the state of U.S. retirement planning. (See also: 12 Things You Didn't Know About Retirement)

In 2014, the average U.S. worker had only accumulated in their 401(k) enough for $4,000 annual retirement income, or about $333 monthly. That's an alarmingly low figure.

Here are five simple ways to boost those underperforming 401(k) plans.

1. Switch Actively Managed Funds to Index Funds

When allocating the funds in their 401(k), folks often choose accounts that promise high returns. In other words, they look to beat the market.

Stop it.

Chasing those high returns is eating away your 401(k) contributions. Funds that try to outperform the market, also known as actively managed funds, generally have higher fees than those that seek to simply track market performance, known as index funds.

While investing in index funds may sound like a boring investment strategy, consider these three facts:

  • While the average expense ratio for actively managed U.S. mutual funds is 1.32%, the Vanguard Total Stock Market Index (VTSMX), the largest index mutual fund, charges just 0.17% per year.
  • Warren Buffett's will stipulates that 90% of his assets be invested in a very low-cost S&P 500 index fund.
  • Mad Money's Jim Cramer has gone on the record about the benefits of index investing: "After a lifetime of picking stocks, I have to admit that Bogle's arguments in favor of the index fund have me thinking of joining him rather than trying to beat him." John "Jack" Bogle, the founder of Vanguard, has championed low-cost index investing since the 1970s.

2. Stop Playing Stock Trader

Would you hire a plumber to fix your car?

Definitely not!

So, why are you insisting on trading the stocks and accounts in your 401(k)?

A nationwide survey of 401(k) participants found that:

  • 52% of American workers find explanations of their 401(k) investments more confusing than explanations of their health care benefits;
  • 46% don't know what their best investment options are; and
  • 34% feel a lot of stress over allocating their 401(k) monies.

If you're still unconvinced about the negatives of actively trading your account, remember that the average actively managed mutual fund has an average annual return of 2% less than that of the stock market. A sample of self-directed account holders showed that 76% of their account returns underperformed the S&P, and 72% underperformed the core model of their plans.

On top of that, some 401(k) plans may charge you additional fees for self-directed brokerage options. Now that's a double whammy for playing stock trader. Instead, request a one-on-one appointment with your plan's administrator (over half of retirement plans offer individual investment advice) to go over your retirement saving strategy, and stick to it. (See also: This Is the Basic Intro to Having a Retirement Fund That Everyone Needs to Read)

3. Consolidate 401(k) Balances

The term "four-year career" has gone from oxymoron to a reality for younger generations. According to data from the Bureau of Labor Statistics, today's average worker stays on the job for 4.4 years. And for younger workers, that time period is cut in half.

This means that there are many workers who have several 401(k) plans laying around. Since not all 401(k)s are alike, it's a good idea to consolidate all those balances into a single account. It will simplify your life and make it easier to keep track of your nest egg's performance.

While there are several criteria to evaluate plans, there are two that lead the pack:

  • Choose the plan with the lowest expense ratio. A good rule of thumb is that your total expense ratio should be no more than 1%.
  • Evaluate the additional perks that may become available for maintaining a larger balance at a single institution.

4. Maximize Employer Contributions to Your 401(k)

Vanguard reports that the most common matching formula for employers is $0.50 on the dollar on the first 6% of pay. This means that an employee with a $50,000 annual salary would receive a $1,500 boost to her 401(k), if she were to maximize her contributions.

It's in your best interest to bump up your savings to the full 6% (or the applicable maximum of your plan) of your pay. If you don't use it, you are missing out on free retirement cash.

Additionally, ask your plan sponsor about a couple of key plan details: true-up and vesting schedule.

True-Up Feature

Some companies have complicated contribution matching formulas, so a true-up feature helps you maximize the amount of possible matching funds under your 401(k)'s guidelines. This feature is particularly useful for those employees that wait for big bonuses to make a contribution to their retirement accounts.

Vesting Schedule for Employer Contributions

Employer contributions to your 401(k) plan may be subject to a vesting period. If you change jobs before the vesting period, you lose your employer's contributions to your retirement plan.

5. Ask Your Plan Administrator for Lower Fees

If you're using an employer-sponsored 401(k), then ask your plan's sponsor to renegotiate operating expenses. During the 2013-2014 period, more than 75% of employers attempted to cut 401(k) expenses, so your request is nothing out of the ordinary.

Find out why your plan administrator is choosing the funds that the're choosing. If there is no record of legitimate reasons, then you have ammunition to demand a re-evaluation of current fees and class shares. The lower your plan's fees, the better your returns.

What have you done to boost an underperforming 401(k)?

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