The choices made concerning your 401(k) can have a big impact on your retirement. But at many workplaces, 401(k) plan managers do not have any financial planning experience at all. With this in mind, it's important for you to understand your 401(k), so that you can maximize your hard-earned retirement dollars.

Is Your 401(k) Planner an Amateur?
It is likely that small- or medium-sized firms don't have the resources to hire full-time employees with specialized expertise in managing 401(k) plans. Despite this, many smaller firms still want to offer 401(k) plans as benefits to their employees. Unfortunately, this means that the task of designing and administrating small business 401(k)s often fall to the company's owner or other senior managers, who may have no experience in this area. (Learn more in our 401(k) Plan Introductory Tutorial.)

Although it is possible for an amateur to set up and run a 401(k) plan, getting the most value for plan participants is another matter. Without the requisite knowledge and experience, it may be very difficult for amateurs to compare competing vendors, choose a suitable investment menu and perform many other important tasks.

And since these duties are piled on top of that person's regular work, it is easy to see how this situation can often lead to a poorly-constructed and neglected 401(k) plan for all participants. (If you own a business, this may be the plan for you! Find out about its benefits and eligibility requirements in 401(k) Plans For The Small Business Owner.)

How 401(k)s are Set Up and Managed
Your employer is in charge of designing all aspects of the 401(k) plan, and will determine the requirements to be able to participate in the plan and whether matching contributions will be made. Employers are also in charge of choosing the 401(k) plan vendor, which will determine, in part, the amount of fees that will be charged to the plan. Finally, it is the employer's option whether the plan will allow Roth (after-tax) contributions.

After the plan has been set up, the employer must assign someone to be responsible for selecting and evaluating investments. Sometimes these decisions are made by one person, other times they are made by a committee. Usually only about 10 or 20 mutual funds can be made available for investment through the plan at a given time. (Learn more in our Roth IRA Tutorial.)

Who's Running the 401(k)?
In small firms, it may be easiest to find out who is managing the plan just by asking around. Contact information may also be attached to the plan summary documents given to you by your firm. At larger firms, 401(k) plans are usually managed by someone in the human resources department. As a last resort, you can request the plan's most recent IRS Form 5500 from the 401(k) plan vendor. This document describes the investments, returns and general condition of your plan. Reviewing the 5500 document should give you several names to contact.

Impact on Retirement Assets
If the plan is run by someone with limited financial planning experience, the choices could all be very poor performing, high expense ratio funds. As is commonly noted, even a 1% difference in fund performance can have an enormous effect on your wealth. Another common problem occurs when the plan does not include a broad enough range of choices to be suitable for all participants' investment objectives. Remember that the person making the decisions about the investment menu has a responsibility to the plan participants, so participants should voice any concerns they might have.

Beneficial Retirement Savings
The first step to maximizing your retirement savings is to become educated about your 401(k) plan. A good place to start is to read the plan summary documents provided to you by your employer. If you find that many of your colleagues are unhappy with the plan, perhaps you can work with your employer to design a better plan. Employers have a lot to gain, as a strong benefits package can increase employee morale and help retain high caliber talent.

If there is no way to change your 401(k), you should still think carefully before deciding not to participate. For example, a generous matching contribution from your employer provides a risk-free return on investment. In addition, the tax benefits of sheltering your retirement funds can be highly valuable, if you regularly max out your IRA contributions. (Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return. Read Tax-Saving Advice For IRA Holders, and How IRA Contributions Affect Your Taxes.)

The Bottom Line
Although it can be distressing to learn that an amateur is managing your 401(k), there are still many steps that you can take to make the best of the situation. By becoming an informed participant in your company's 401(k) plan, you can not only maximize your retirement assets, but also make yourself an asset to your employer by helping to create a better benefits package.

Related Articles
  1. Mutual Funds & ETFs

    Top 3 PIMCO Funds for Retirement Diversification in 2016

    Explore analyses of the top three PIMCO funds for 2016 and learn how these funds can be used to create a diversified retirement portfolio.
  2. Retirement

    How Much Should You Have In Your 401(k) To Retire?

    Determining how much money should be in your 401(k) when you retire depends on several variables, many of which are uncertain.
  3. Retirement

    Retiring in Thailand: The Pros & Cons

    It's a lovely land, but before relocating, get the skinny on this Southeast Asian kingdom.
  4. Investing

    How To Make Sure Your Healthcare Costs Do Not Ruin Your Retirement

    The best proactive plan of action for a stable retirement is to understand medical costs, plan ahead, invest properly, and consider supplemental insurance.
  5. Retirement

    Is Retiring in France Safe Today?

    After a series of deadly terrorist incidents, some may be asking themselves this question.
  6. Investing

    3 Small Steps to Maximize Your Investing Goals

    Instead of starting the New Year with ambitious resolutions, why not taking smaller manageable steps that can have a real impact.
  7. Investing

    7 Creative Ways to Save for an Early Retirement

    Take note of these out of the box steps you can take towards securing yourself an earlier, more comfortable retirement.
  8. Your Clients

    Tips for Making Your Nest Egg Last Longer

    If you’re trying to figure out how to make your hard-earned nest egg last, there’s one piece of advice that stands above the rest.
  9. Personal Wealth & Private Banking

    What People Hate About Financial Advisors

    Advisors need to make a living too, but doing so by cutting corners at a client's expense isn't right. Here are the top complaints against advisors.
  10. Products and Investments

    SRI Funds and Your 401(k): What You Need to Know

    Socially responsible, green and impact investing options are now DoL-approved for 401(k) plans. Here's what investors should know.
RELATED FAQS
  1. What is a 401(k) rollover?

    A rollover occurs when a plan participant takes a distribution of cash or other assets from a 401(k) plan and then contributes ... Read Full Answer >>
  2. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  3. What is the maximum I can receive from my Social Security retirement benefit?

    The maximum monthly Social Security benefit payment for a person retiring in 2016 at full retirement age is $2,639. However, ... Read Full Answer >>
  4. Are target-date retirement funds good investments?

    The main benefit of target-date retirement funds is convenience. If you really don't want to bother with your retirement ... Read Full Answer >>
  5. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  6. Will quitting your job hurt your 401(k)?

    Quitting a job doesn't have to impact a 401(k) balance negatively. In fact, it may actually help in the long run. When leaving ... Read Full Answer >>
Trading Center