How to Tell if You Have a Lousy 401(k) Plan

Some 401(k) plans offer better benefits to plan participants than others.

Some 401(k) plans offer better benefits to plan participants than others.
By + More

Investing in a 401(k) plan allows you to defer paying income tax on the money you save for retirement, helps automate your decision to save for retirement by having the money withheld from your paycheck and often allows workers to get valuable employer contributions. However, investing in a 401(k) plan isn't always worth it, especially if your plan has high fees, poor investment choices and no employer contributions. Here's how to tell if your employer is providing a subpar 401(k) plan:

No immediate eligibility. Ideally, you should start saving in a 401(k) plan with your first paycheck, but many employers won't let you. Only 54 percent of 401(k) plans offer immediate eligibility, according to a recent Vanguard analysis of 2,000 401(k) plans with 3 million participants. And 16 percent of 401(k) plans require workers to be with the company for an entire year before they are able to put their money in the plan. "It's sort of a legacy of when record keeping was more manual," says Jean Young, a senior research analyst for the Vanguard Center for Retirement Research. "You want to make sure that somebody is going to be with your organization before you enroll them."

[Read: 10 Trendy 401(k) Plan Perks.]

No employer contributions. Most Vanguard 401(k) plans (91 percent) offer an employer contribution. The best 401(k) plans immediately provide employer contributions to workers, but the majority of 401(k) plans impose a waiting period before new employees are eligible for a match or other company contributions. Many 401(k) plans require between one and six months (27 percent) or even an entire year of service (28 percent) before employees become eligible for a 401(k) match.

A very small match. The maximum possible match employees can get is a median of 3 percent of pay among all Vanguard 401(k) plans. The bottom quarter (24 percent) of 401(k) plans offer a maximum possible employer match of less than 3 percent. The top 15 percent of plans provide employer matches worth 6 percent or more of pay.

A match that is difficult to take advantage of. Employer contributions vary considerably by employer, with Vanguard alone administering 401(k)s with more than 200 different match formulas. Almost half (48 percent) of 401(k) plans require employees to contribute 6 percent of their pay to the 401(k) plan to capture the maximum possible 401(k) match. Other employers require workers to save between 3 and 5 percent of pay (37 percent) or at least 7 percent (11 percent) to get the entire match offered.

The exact match formula plays a role in how easy it is for employees to actually take advantage of company 401(k) contributions. The most common 401(k) match is 50 cents for each dollar contributed up to 6 percent of pay, and 24 percent of 401(k) plans use this match formula. Another 14 percent of 401(k) plans offer a multi-tier match formula such as $1 for each dollar saved on the first 3 percent of pay and 50 cents for every dollar contributed on the next 2 percent of pay. And 7 percent of plans cap the maximum amount of employer contributions workers can get.

Match formulas have the biggest impact on workers who can only afford to save a small amount. Consider a worker who is able to save 3 percent of her salary in a 401(k) plan. If her employer matches 50 cents for each dollar contributed up to 6 percent of pay, she would get 1.5 percent of her pay as a 401(k) match instead of the maximum possible match of 3 percent. If her employer instead matched dollar for dollar the first 3 percent of pay, she would be able to take advantage of the entire match offered with the same maximum potential cost to her company.

[Read: 10 Things You Should Know About Your 401(k) Plan.]

No nonmatching contributions. Some employers contribute to a 401(k) plan on behalf of employees without them having to save anything on their own, contributing a median of 4.2 percent of pay. The most generous 401(k) plans (16 percent) provide employer contributions worth 10 percent or more of worker salaries.