Poor investment choices. The average Vanguard 401(k) plan offered 27 investment options in 2012, up from 16 in 2003, many of which were recently added target-date funds. "If you have more than 20 options it's probably not going to be a user-friendly plan," Carosa says. "It's going to put too much of the burden of deciding what to invest in on the employee." However, almost half of Vanguard 401(k) plans now offer at least four low-cost index funds that invest in U.S. equities, international equities, bonds and cash, up from a quarter in 2004. "The index core is going to have the lowest cost typically, and costs have been demonstrated to be very important in terms of predicting future outcomes," Young says.
High fees. Most 401(k) plans charge a variety of fees ranging from record-keeping costs to expense ratios on each investment option. You want to make sure that the expenses aren't excessively high. "An easy to remember rule of thumb is to look and see who is selling the fund to the plan. If the fund is being sold by a broker or an insurance company that is working in a non-fiduciary capacity there is a good chance that you will have these excess fees," Carosa says. "You want to make sure that none of the options in the plan have 12b-1 fees or revenue sharing."
401(k) plans are now required to give all investors information explaining the fees associated with each investment option in the plan, due to new U.S. Department of Labor rules. Make sure you look at these quarterly and annual 401(k) statements, and keep costs in mind when making investment decisions. "The fee is 100 percent certain; the return is not guaranteed," Loeper says. He recommends aiming to pay no more than 75 basis points for most investments, and less than 20 basis points for index funds. "If you are paying more than three-quarters of a point," he says, "somebody is making excess profits or is gambling with your money."