When I began working, most employers didn’t offer 401k and other retirement plans. The first company I worked for that offered a retirement plan provided a match of 50¢ for each dollar you contributed, up to 6% of your salary. So basically, if you contributed 6% the company added 3% into your account. I thought I was getting rich! The money was vested after you were with the company for three years; if you left before then you received none of the match.
At the time, that was a good plan. However, in the years since, more companies have gone to immediate vesting, a dollar-for-dollar match, automatic participation, and more recently Roth 401(k)s. In addition, actively managed funds (which made up the majority of my first retirement plan) have often been replaced by cheaper index funds, and some 401(k)s even offer a brokerage option where you can trade individual stocks in your retirement plan.
With all that’s changed, how can you know whether the plan your company offers is competitive with the best plans?
High-level plan comparison
Bloomberg offers a plan comparison that provides an overall look at their highest-rated plans (including match, vesting and fund types). However, it uses data from 2014. This can still help you understand the range of options other companies provide, just know that some information may be out of date.
You can search online for companies offering great retirement plans for more updated information. For instance, according to an Investopedia article from 2022, ConocoPhillips offers a 6% match when an employee contributes just 1% of their income. If you work for Amgen, they invest in your retirement even if you don’t – they provide a 5% contribution even if you invest zero. Vesting for both of these plans is immediate.
Investment options
Plans provide more fund options now than in the past. Many that have automatic enrollment (meaning that you are enrolled in the retirement plan unless you opt out) initially place your money into a target date fund. Others have heard the call for index funds from people wanting to mirror the three-fund portfolio. At the very least, your plan should have a money market fund, bond funds, and stock funds. The best plans will offer funds that cover a large range of options; for instance, you may find stock funds focused on US or international stocks, and have the option to choose a value or growth fund for different sized companies (large cap to small cap).
Plan fees
Unfortunately there’s no free lunch when it comes to 401k plans. Someone has to pay for the marketing materials, website access, and plan administration that comes with your retirement plan. The size of your company will make a large difference in how the fees are paid (some large companies simply pay for the plan as a benefit) or how much each person must pay.
You can usually find fee information in your plan’s annual report (Form 5500), which you should be able to request from your human resources department. If you see your plan’s fees expressed as a total dollar amount, simply divide by the total plan assets to get a percentage. If you can’t find the fee in the Form 5500, you may discover it’s in the Summary Plan Description (also available to every employee) or you will need to follow up with HR.
Large companies (those with more than $100M in assets) usually have fees below 1%; some even average 0.5%. Smaller companies’ fees are often 1% or more.
Provider communications and education
I worked for a 401k administrator providing employee education and motivational messages in an attempt to persuade more employees to participate in their retirement plan. Think about the messages you have received from your plan provider. Did they initially send you appropriate and full communication about your plan, how it works, and your investment options? Does your company regularly have a representative on site to answer questions? How’s the website – can you access your information easily? While not exactly the same, your retirement plan administrator should provide a website much like online brokers, where the information you need is arranged where you can find it easily.
Additional features
My wife’s employer offers both a pre-tax and an after-tax retirement plan, so you can invest in a Roth option or a traditional 401(k). The plan also provides for loans and hardship withdrawals and has a match that’s out of this world. For an extra administrative fee, the plan offers a self-directed brokerage option.
When you compare your plan to others, are you lacking certain features that you and your colleagues want? Researching the top plans can educate you on what’s possible for your retirement plan.
What if I find my plan lacking?
If you discover that your 401k plan needs some shoring up, check with your colleagues to see if they agree with you. That way, when you talk to HR about your concerns you already have a subset of coworkers who feel the same way. While you’re talking to others, come up with a list of must-haves and nice-to-haves so that you have some negotiating room. And be flexible on the timing of changes. Companies usually have signed on with a provider for a year or more; asking for seven new fund options and a self-directed brokerage in the next month probably won’t happen.
Consider options other than your 401k plan
Should HR turn a deaf ear to your concerns, still try to find a way to use your retirement plan to benefit you. If you receive any match, you should contribute the amount necessary to receive the full match every year. You may have to invest your money in a sub-optimal fund, but remember you are being offered free money just for participating.
For those with truly awful fund options or no match, you may want to consider investing first in an IRA or a Health Savings Account, which can provide many of the same tax benefits as a retirement plan but will offer no match.
Companies want their employees to feel appreciated, especially recently with the extremely low unemployment rate. If you find holes or high fees in your retirement plan, they should strive to correct these. Do your research, and have it as backup for any requests you are making. More than likely, they will want to provide the best plan they can.
Photo by William Warby