A 401(k) plan is a popular way to save for retirement, but each employer determines what to offer with their own plans. Different 401(k) plans can have different fees, matching contribution limits, and investment options.
To determine whether your 401(k) is competitive, you can compare its terms and offerings with other 401(k) terms. To do that, you can use a website like Brightscope or Morningstar, which provide ratings for individual 401(k) plans, as well as on specific investment choices.
In this article, we’ll show you how to compare your 401(k) to others, and what factors you should review to assess your plan.
- Bloomberg, Brightscope, and Morningstar have online tools that can help you to compare your 401(k) to others.
- Compare your plan's fees, options, investment quality, and employer match.
- If your plan is more expensive or more limited than some others, consult your plan administrator.
- If you administrator is unwilling to make your plan more competitive, consider diverting some of your retirement investments into other accounts.
How To Compare 401(k) Plans
You can compare your 401(k) plan with others at various different levels. For a quick assessment, online tools such as one offered by Bloomberg that will allow you to review how your plan compares to the average plan.
If you want to make a more in-depth comparison, you’ll need to collect some key information about your plan. Your summary plan description (SPD) and annual report (Form 5500) can provide key information. If you don’t receive this report automatically, you can request it from your company.
With this information, you can conduct a review of administrative costs, fund choices and their expenses, and employer matching contributions. You'll also learn about additional features such as the ability to make after-tax Roth contributions.
You can then compare these options and costs against other 401(k) plans offered in your industry. There are two main companies that provide this information: Brightscope and Morningstar. You can use either website to access information on funds and see their rating.
When comparing your 401(k) to others, you should look at four key benchmarks: matching contributions, fees, options, and investment quality. Here are these benchmarks in more detail:
Not all employers offer matching contributions, but they can be an important benefit of your 401(k) plan. The average matching contribution limit is 4.5% of your salary, and the median matching contribution limit is 4.0%, according to a Vanguard study.
You should also look at the vesting schedule for any matching contributions. A vesting schedule is how long you'll need to stay at the company before you have the rights to the contributions.
Financial advisors recommend contributing up to the employer match to avoid leaving "free money on the table." If your plan doesn't offer the investment options you want, you can then invest money beyond your employer's matching limit in another retirement plan, like an IRA.
Fees are can vary significantly in 401(k) plans and they can impact how quickly you save for retirement. Even a difference of just 0.5% in plan fees can make a significant difference to how much money you save for retirement.
Plans can charge administrative fees in a number of ways, so it can be difficult to compare them. A good start, however, is to look at your Form 5500. On this form, you might see your fees listed as a dollar amount. You’ll need to divide that figure by the total assets in the plan to get your expense ratio.
The average 401(k) plan has an expense ratio of about 1%. BrightScope.com and the 401(k) Averages Book provide other comparative information on 401(k) plan expenses. If your plan is much more expensive than average, consider asking your employer about it.
Another important aspect of your 401(k) plan is how much choice it gives you. Employers choose which investments to offer in their 401(k) plans and they have a responsibility to offer “prudent” options to plan participants. So, they tend to limit your investment options.
You can expect some basic minimum options for your 401(k), however. You should have access to well-diversified U.S. stock, foreign-stock, and core bond funds. A 401(k) should also offer a range of target-date funds. Most employers don't provide access to exotic, volatile investments for your 401(k), but it’s fair to expect a good mix of stock and bond funds.
You should also assess the quality of investments available to you. You can use Morningstar’s rating system to see whether the funds you can buy for your 401(k) are of high quality, as indicated by a Morningstar Analyst "gold" rating.
If you find that the funds are expensive or have performed poorly, you can ask your 401(k) plan administrator if they would consider adding more options.
Where Can I Find Data on 401(k) Plans?
BrightScope and Morningstar have extensive databases on funds and 401(k) plans. You can also use tools offered by Bloomberg, which will allow you to make a quick assessment of how your plan stacks up against the average.
What Is a Good Employer Match For a 401(k)?
The average employer match for 401(k) accounts was 4.5% in 2020, and the median was 4.0%, according to a Vanguard study. Employer matches that are more than this, such as a 5% or 6% match, can be considered a "good" employer match.
What Is The Average 401(k) Expense Ratio?
Understanding the expense ratio for your 401(k) plan can help you compare it to others. As of 2021, the average 401(k) plan has an expense ratio of about 1%. Plans with more participants tend to have lower fees, and vice versa.
The Bottom Line
Tools provided by Bloomberg, Brightscope, and Morningstar can help you to compare your 401(k) to those offered by other companies in your sector. You should compare your plan across four main areas: matching contributions, fees, options, and investment quality.
If you find that your plan is more expensive or more limited than some others, you can talk to your plan administrator. If they are unwilling to make your plan more competitive, you can consider diverting some of your retirement investments into other instruments.