Which 401(k) changes should you urge your company to consider? Here are four popular options:
Funds with lower fees
It's not unusual for 401(k) plans to be loaded with excessive costs.
"Many 401(k)s offer expensive, underperforming plans," says Daniel Solin, author of "The Smartest 401(k)
Book You'll Ever Read."
Here's what happens: A portion of the money that you use to invest will go toward fees to handle your
investments. Higher fees mean more expensive investments.
Ideally, higher fees would also mean that your plan is being better managed to reap bigger returns, but
that isn't necessarily the case. Studies have found that many low-cost investments (like index mutual funds, which aren't
actively managed) actually make more money than the expensive alternatives.
"With mutual funds, if you look in your plan documents, you can find the expense ratio of each fund," Solin
says. "The average actively managed fund has an expense ratio of about 1.5 percent a year."
If your actively managed fund charges more, then it's a relatively expensive fund. And remember that index
funds often charge much less than actively managed funds. It's not unusual for index funds to have expense ratios of 0.5
percent or less.
Regardless of how much your investment costs, you still need to see if you're getting a good return for your
money compared to offerings from other companies. Web sites like Morningstar.com let you see how your funds stack up against
others when comparing fees and historic returns on investment.
If you can't find what fees your investments charge, call your benefits or human resources department and
ask for help.
Life-cycle funds and more diversity of choice
Life-cycle funds, which automatically reallocate assets each year based on a goal retirement date, are gaining in popularity.
"People are starting to ask if their company offers these target retirement funds," Solin says.
Such funds could be a convenient option for workers who aren't familiar with investing, but still want to
make smart choices about their retirement.
Other employees prefer to make their own investment choices, but they need good options from which to choose.
If they have a long time until retirement and can tolerate the stock market's ups and downs, they generally ask for a larger
allocation of aggressive funds.
Workers who are closer to retirement or just don't have a high tolerance for risk generally ask for a larger
allocation of conservative choices. Companies that offer a generous mix of aggressive and conservative stocks, bonds and mutual
funds are more likely to meet the needs of their employees.
"As long as the 401(k) plan has a diverse selection of asset classes, an employee should be able to do a pretty
good job (investing) using the funds available in the plan," says Gil Mateer, president of the Retirement Services Group at Bryn
Mawr Trust Company in Bryn Mawr, Pa.
"I don't want employees to take their eyes off the goal. The real critical thing is to save as much as you
Roth 401(k) option
Money that's used to contribute to a Roth 401(k) is taxed up front, but this investment vehicle is still in demand. That's
because employees can combine the regular benefits of a 401(k) -- like higher contribution limits and a possible employer
match -- with the added advantage of the Roth's tax-free earnings.
Companies have to pay money to set up and administer their 401(k) plans. But if they aren't also willing to provide the
benefit of an employer match, there isn't as much of an incentive for an employee to join the plan.