Signs You Have a Bad 401(k) Plan and What to Do About It

Sometimes we’re just happy to be with an employer that has a 401(k) plan, since so many don’t.

It may not even seem important whether or not it’s a good plan or a bad one – at least not at the beginning.  After all, any 401(k) plan is better than having none at all.

But there are bad 401(k) plans out there, and that becomes even more important and obvious the longer you’re in one.

What are Some Signs of a Bad 401(k) Plan?

No employer match

One of the real incentives to invest money in a 401(k) plan is an employer match.

A typical match is 50%, where the employer contributes 3% of your income while you contribute 6% out of your compensation.  Employer matching contributions can be more or less generous.

Some employer plans provide no match at all.  In and of itself this does not indicate a bad 401(k), but in combination with other negative factors it’s a strong sign.

Poor or limited investment choices

Many 401(k) plans have poor or very limited investment options.  A plan may offer only six or seven investments, including a single investment option for each investment class.

There may be a single mutual fund for each of the following classes:

  • Small cap growth
  • Mid cap growth
  • An index fund
  • A bond fund
  • An international fund
  • Money market fund
  • Company stock – the only individual stock offered in the plan

While it may seem that the plan has the major investment bases covered, there’s no depth, and only limited diversification.

For example, if you wanted to invest a portion of your plan in energy stocks, real estate investment trusts, or a Pacific Rim-centered fund, you’d be out of luck.

In addition, if the funds provided under-perform the general market, you’d be stuck with lackluster returns.

High fees

A high fee issue often goes hand-in-hand with a plan with poor or limited investment choices.  If that is the case with your plan, it will have two strikes against it from the start.

The plan could be locked into a mutual fund company that either charges high transaction fees or only offers load funds.  Or it could be administered by a trustee that charges high administrative 401(k) fees.

What ever the source of the fees, they will cut into investment returns over the long run.  In combination with poor/limited investment choices, this could be a real deal breaker.

Long vesting period

a bad 401(k) plan is a broken 401(k)Any money that you contribute to your employer’s 401(k) is immediately 100% vested.

Employer matching contributions however are subject to vesting provisions.  This means that if you leave your company before you are fully vested in the plan you will lose some or all of the employer match.

There are two types of vesting schedules, graded and cliff.

Graded vesting works in phases.  You may have a graded vesting schedule that will provide 0% vesting after one year, 20% after two years, 40% after three years, 60% after four years, 80% after five years, and 100% after six years.

Graded vesting schedules can offer faster vesting, but six years is the maximum under current law.

Cliff vesting means that the employer contribution will be fully vested after a certain point, with three years being the maximum, though a plan can vest in less time.

If your employer contributions vest at the maximum of either vesting schedule (six years graded, three years cliff), it’s an indication of a less than desirable 401(k) plan.

What to Do if Your Plan is a Dud

If you are with an employer who has a bad 401(k) plan, you do have options!

Talk to human resources

If it’s a small company, you may be able to have some influence over the future direction of the plan with the human resources department.  If it’s a larger employer, you’d better get a lot of company going in with you!  There’s no guarantee that you will be successful, but if you complain and other do as well, change could come about.

Set up your own retirement accounts outside the job

If there’s no way to fix the plan through your employer, open your own plans.  If you are within certain income limits, you can fund your own IRA or Roth IRA.  IRAs will give you virtually unlimited investment options and are completely self-directed.

You could also start a side business that will give you even more options, such as a SIMPLE IRA.  These plans won’t replace your 401(k), but they will give you additional plans that you can run your own way.

Use the 401(k) for a single investment class and diversify outside.

If you do open non-employer retirement plans, you can use the 401(k) to hold a single and relatively safe investment class, such as your bond fund holdings.  Growth investments can be held in your IRA or other investment accounts.

Change employers.

OK, this is admittedly extreme, but if loading up your 401(k) is an important career goal, it may be time to plan on plying your craft at another employer – one with a truly generous plan.

Of course, you won’t even think about this if you’re generally happy with your job, but if there are other issues you have with the job, a bad 401(k) could be a tipping point.


Having a 401(k) plan where you work is an awesome benefit to have.  But as you can see there are times where that benefit isn’t as good as it can be.

Even though a 401(k) can be very much a hands off investment (since the money is taken from your paycheck automatically) you still need to be aware of how your 401(k) works.  After all you may be stuck with a bad 401(k) and need to follow some of the tips above!

What would you do – or what are you doing now – if your employer has a bad 401(k) plan?

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Published or updated February 12, 2013.


  1. Sometimes you can not do anything!or almost anything I work for a school district and there is no match. They do not do a good job on picking low cost funds either and the expenses are higher as well. The good news is I get a pension and bad news is I get around the higher fees. They used to offer Fidelity, but dropped them years ago. They offer annuities for the most part and I avoid them like the plague. I am with TIAA-CREF and I managed to reduce the fees. I use their self directed brokerage accounts.

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