Before deciding if your 401(k) is underperforming, make sure you're comparing it to the right benchmark. A common mistake is comparing a diversified portfolio—for example, including U.S. stocks, international stocks, and bonds—to the S&P 500, which only tracks large U.S. companies. That’s like comparing apples to oranges—your returns won’t match, but that doesn’t mean your investments are underperforming. First, review your 401(k)’s holdings to understand what asset classes you’re invested in, then compare performance to a blended benchmark that reflects a similar mix. Many 401(k) providers offer performance comparison tools on their websites, which can help you assess your portfolio more accurately.
Other reasons your 401k may be underperforming:
High Fees Eating Into Returns: Some 401(k) plans have high expense ratios on mutual funds, administrative fees, or hidden costs. Review your 401(k) plan’s expense ratios—try to choose funds with an expense ratio below 0.50%, look for low-cost index funds (e.g., S&P 500 index funds).
Poor Investment Allocation (Too Conservative or Too Aggressive): Being too conservative (too much in bonds or cash) can result in low returns, while being too aggressive can lead to high volatility. Check your asset allocation, and if you determine that your allocation isn’t right for your goals, consider adjusting your mix. If you’re unsure how to adjust, use your plan’s risk assessment tool to find a mix that fits your age and risk tolerance. An option for a hands-off approach, may be using a target-date fund, as it automatically shifts from aggressive to conservative as you near retirement. If you're within five years of retirement, consider working with a financial planner to determine the right investment mix. 401(k) tools only assess your plan’s assets, but a planner can factor in your spouse’s savings, income needs, and other key financial considerations to create a strategy that supports your full retirement picture.
Not Contributing Enough (Missing Employer Match): If you’re not contributing enough to get the full employer match, you’re leaving free money on the table. Increase contributions at least to the level needed to receive the full employer match. If you can’t afford it all at once, increase contributions gradually (e.g., 1% every six months or every year). Take advantage of annual raises or bonuses to boost contributions without feeling the impact.
Market Volatility & Poor Timing Decisions: Many people panic-sell during market downturns or buy high and sell low, which hurts long-term returns. Stick to a long-term investing strategy—don’t make emotional decisions. Keep investing regularly through automatic contributions (dollar-cost averaging helps smooth out market ups and downs). If nervous, rebalance instead of selling—adjust allocations to maintain your preferred stock/bond mix.
Not Rebalancing the Portfolio Regularly: Over time, your portfolio may drift—for example, stocks may grow too much, making your allocation riskier than intended. Review your 401(k) at least once a year and rebalance if needed. Many plans offer automatic rebalancing—turn it on if available.
Lack of Investment Choices: Some 401(k) plans have limited fund options, making it hard to diversify or find low-cost funds. Use a self-directed brokerage option (if available) to access a wider range of investments. If your plan is really bad, contribute just enough to get the match and invest additional funds in an IRA or taxable brokerage account.
Old 401(k) Accounts Are Scattered: Having multiple old 401(k) accounts makes it hard to track your investments and could lead to higher fees. Consolidate old 401(k)s into your current employer’s plan or a low-cost IRA for easier management. This can help reduce fees and keep your investment strategy consistent.
Borrowing from Your 401(k): When you take a 401(k) loan, that money stops growing, and if you leave your job, you might have to repay it fast—or face taxes and penalties. Consider other financing options before borrowing from your 401(k). If you take a loan, pay it back quickly and continue making contributions.
Final Thoughts
A 401(k) underperforming doesn’t mean you’re stuck. By minimizing fees, optimizing asset allocation, maximizing contributions, and staying disciplined, a regular person can boost their retirement savings significantly.
WE'RE MEMBERS OF
