When it comes to 401(k) plans, bigger is usually better. They have more of everything at a lower cost.
While I'm hardly a fan of 401(k)s -- they are still voluntary, flawed programs -- size matters when looking at 401(k)s. And if you don't work for a large company? See below for what you should ask for in your plan.
Across the board, the bigger plans have more of everything, including qualities that every plan should have. Here's what a recent Brightscope/ICI study found:
* Larger 401(k) plans are more likely to automatically enroll workers into the plan and offer employer contributions.
* Target date funds have become more common in 401(k) plans since 2006.
* Costs are generally lower in the larger plans.
The drawbacks of big plans? For one thing, if you don't sign up, you don't save. And your employer doesn't have to offer one or provide a matching contribution.
More than half of the U.S. workforce isn't offered a 401(k)-type plan. The smallest companies are unlikely to offer any retirement program. Also, employees at big companies tend to have outstanding 401(k) loan balances.
What You Can Do
Since the government doesn't require companies to offer mandatory features or control 401(k) costs, you're pretty much on your own. You can improve your plan, but you'll have to lobby your employer to do it.
First, start with costs. Big plans always have economies of scale and don't pay "retail" investment management expenses. How much is too much? According to the Brightscope/ICI study, expenses have been dropping the big plans, so you can use the following for a benchmark in your own plan:
"Mutual fund fees in 401(k) plans tended to fall between 2009 and 2013... For instance, the average asset-weighted expense ratio for domestic equity mutual funds was 0.81 percent for plans with $1 million to $10 million in plan assets, compared with 0.44 percent for plans holding more than $1 billion in plan assets. A fund expense ratio is total costs as a percentage of assets."
Translated from 401(k) planspeak, you should try to get mutual or exchange-traded funds in your plan that charge under 0.40% annually. Most large index mutual or exchange-traded funds charge well below that. Some bond or money funds charge no annual expense at all.
While target-date funds (TDFs) are desirable, make sure they are low cost and fully disclose the amount of risk they are taking. They package and manage a basket of mutual funds, but should be monitored. How much do they hold in stocks? How much can they lose in a bad year (like 2008)? Will they stay invested in stocks through your retirement date? Is that okay by you?
The last bit of business is to know that any plan can be changed. Your employer can change vendors and put your 401(k) contract out to bid. They can even hire an independent fiduciary consultant to find the best deal.
At the very least, every employer should be looking around to get the best plan on a regular basis. It's their legal obligation to do so and they will ultimately help you save more for retirement.
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