Why Your 401(k) Might Be Underperforming and What You Can Do About It

If your 401(k) isn’t performing as well as you wish, there are things you can do about it. First, determine the reasons for the sluggish performance, and then make some changes toward a more profitable 401(k) plan.

Here are five reasons why a 401(k) plan may be underperforming.

Choosing a Target Date Fund

Target date funds make investing a breeze, but they may not give you the type of return you are looking for in your 401(k).

“This is a fund that tries to get near your 65th birthday as a retirement year; e.g., 2030, 2035 … 2060, 2065. They start off with a higher allocation to stocks vs. bonds the younger you are and then progress to get more conservative by having more in bonds than stocks as you approach retirement,” says Jarrod Sandra, certified financial planner at Chisholm Wealth Management.

If you don’t choose another investment in a 401(k) plan, you may be automatically invested in a target date fund.

“Target date funds are now the leading default investment for employees within 401(k) plans, and most target date funds are underperforming the market because of their asset allocation,” says John Bovard, a certified financial planner at Incline Wealth Advisors. “401(k) participants can log in to their account and rebalance into an S&P 500 fund or some other large-cap growth fund to become more aggressive.”

High Investment Fees

If you are paying large fees on your 401(k) investments, this may cause your 401(k) to underperform. Evaluate 401(k) fees by reviewing your Participant Fee Disclosure document.

“Check the list of fund options in your 401(k), and you should be able to see the expense ratio for each fund,” says Carla Adams, founder and financial planner at Ametrine Wealth.

If the fees you are paying are higher than you like, choose a more cost-effective investment option that is still in line with your financial goals. Look for investments with low expense ratios.

“Each 401(k) plan has its own option of investments to choose from, so you may not have access to super-low-cost funds, but ideally you should be investing in only funds with expense ratios of under 0.20%,” Adams says.

Performance Chasing

If you keep moving around your 401(k) investments in search of the highest returns, you may end up with an underperforming 401(k).

“Rather than choosing funds off of recent performance, come up with a long-term strategy of which fund you plan to invest in and stick with it for the long run,” Adams says.

If you come across a poorly performing fund in a 401(k), report this fund to the plan administrator.

“401(k) administrators also have an obligation to regularly review the funds they’re offering in the plan, so if any funds are consistently underperforming, the plan may end up removing the fund and replacing it with a better option,” Adams says.

Conservative Investments

If you choose to invest in more conservative assets such as bonds, you can expect a lower return on your investments.

“How is your 401(k) allocated between stocks and bonds? If you are heavily invested in bonds, then you should expect your 401(k) to underperform the stock market more often than not, so comparing your performance to the S&P 500 is not appropriate,” Adams says.

If your investments are too conservative for your financial goals, you can change them to more aggressive options.

“This is an opportunity to shift your portfolio more into stock funds, so long as you understand that with a higher expected return, you should expect more volatility as well,” Adams says.

Not Contributing Enough

Some 401(k) investors have lower-than-expected returns in their 401(k) because they are not contributing enough to receive an employer’s free matching contribution.

“A company matching contribution is like an immediate 100% return on investment,” says Kyle Harper, a certified financial planner with Harper Financial Planning.

So don’t miss out on this free money from your employer. If your company offers a 3% matching contribution, invest 3% into your 401(k), and receive the additional 3% contribution from your employer for your retirement savings.

The Bottom Line

Discovering that your 401(k) is underperforming is not good news. But there are things you can do to gain a greater return on your investment.

If you have been investing in a target date fund, you may want to move to a more aggressive investment, such as a large-cap growth fund. If you are paying high fees in your 401(k), switch to investments with low fees aligned with your financial goals. If you bounce around from investment to investment, seeking higher returns, choose an investment that will meet your financial needs and stick around for the long term.

If you’ve been conservative with your investments, you may want to move to a more aggressive stock fund. Finally, don’t forget to contribute enough money into 401(k) to qualify for a company’s matching contribution. That’s free money from your employer that you can use for your 401(k) investments.