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Personal Finance

How Does Your 401(k) Plan Stack Up?

These statistics on employer matches, investment options, and more can help you determine whether your company's plan serves you well.

Note: This article is part of Morningstar's January 2014 401(k) Week special report.

More than 50 million U.S. workers participated in a 401(k) plan in 2011, according to figures from the Investment Company Institute. For many of them, that employer-sponsored benefit represents the lynchpin of their retirement plan. But not all 401(k) plans are created equal--not by a long shot. There are tremendous variations in terms of how plans operate, what they cost, investment offerings, and other characteristics.

To determine how your employer's 401(k) plan compares to most, let's look at some key statistics. Unless otherwise noted, the numbers below come from the Plan Sponsor Council of America's annual survey of 401(k) plans for 2012. Respondents include nearly 700 plans of various sizes that offer a 401(k) alone or a 401(k) in combination with a profit-sharing plan.

Company Match/Vesting Schedule
One of the most critical components of any 401(k) plan is the company match. After all, money that participants get simply for contributing to their own retirement basically amounts to free cash, and the more of it the better, right?

The vast majority of 401(k) plans (83%) offer an employer match, but only 46% of employers match employee contributions immediately, while 30% require one year of service before matching. The average employer match in 401(k)-only plans is 2.7% of the employee's salary, which represents a rebound from a recent low of 2.1% in 2009, during the recession, though not yet a full rebound to 2008's level of 2.9%. Combined 401(k)-profit sharing plans tend to have much higher employer matches, averaging 5.4% of pay.

Most companies match employee 401(k) contributions either dollar-for-dollar (38%) or at 50 cents per dollar contributed (40%). The most commonly used arrangement matches 50 cents on every dollar contributed up to 6% of employee pay, a system used by about one-quarter of all plans that offer matches. Incidentally, the survey found that plan participants making more than $115,000 per year contribute an average of 6.6% of pre-tax pay each year, while those making less than that contribute 5.2% on average.

Vesting schedules, which determine when the employer match becomes property of the employee, vary greatly. About 40% of plans offer immediate vesting while 35% of plans make employees wait five years or longer to become fully vested.

Investment Options
Plans typically offer more than 10 funds from which employees can choose, with more than one-quarter of plans offering more than 20 funds. This level of variety can be a plus, as it provides participants with more investment options than a more stripped-down plan, but more choices also can be a negative. For example, some investors become overwhelmed by the sheer number of funds in their 401(k)'s lineup and decide to spread contributions among all of them rather than pursuing a well-considered strategy.

The most commonly offered fund types are actively managed domestic- and international-equity funds and index domestic-equity funds, each of which is offered in four out of five plans. International equity index funds are offered only in about one out of three plans, however. Actively managed bond funds also are prevalent, appearing in three out of four plans, while bond index funds appear in fewer than half of all plans. Another common fund offering is the target-date fund, found in two out of three plans. About one-tenth of employers offering target-date funds in their plans offer versions that are customized for that plan's participants. Also worth noting is that a little more than one-third of all plans offer employees professional management of their 401(k) accounts.

Investment Advice
One often-overlooked feature of 401(k) plans is the financial advice available to participants. Thirty-five percent of plans offer some form of advice, often through a web-based provider (38%), but occasionally through a registered investment advisor (26%), a financial advisor affiliated with the plan provider (25%), or a certified financial planner (14%). About one-third of plans offer guidance for plan participants on taking retirement or pre-retirement distributions.

Expenses can vary greatly from plan to plan based on the number of participants, the funds offered, and other factors. Larger plans tend to cost less for participants than smaller plans due partly to the fact that administrative expenses can be spread more widely in larger plans than in smaller plans. A 2011 study by the Investment Company Institute found that the median participant-weighted fees for 401(k) plans--including administrative, record-keeping, investment, and other expenses--was 78 basis points (0.78%). The same study also found that for plans with fewer than 100 employees, fees averaged 1.29; whereas for those with 10,000 or more employees, they averaged 0.43%.

Roth Option
Although most 401(k) plans allow for contributions made on a pre-tax basis, some also allow aftertax contributions--also called Roth 401(k)s--that allow the participant to take tax-free distributions upon reaching retirement age. Fifty-four percent of survey respondents offer a Roth 401(k) option. Among plans that do, however, only about one in five participants made Roth 401(k) contributions in 2012.

Loans and Hardship Withdrawals
For 401(k) participants who want the flexibility to take money out of the account in case of an emergency or unforeseen circumstance, a plan's policy on loans and hardship withdrawals can make a big difference. The vast majority (88%) of plans allow participants to borrow money from their accounts, and the vast majority of these (90%) charge fees associated with doing so. Likewise, 88% of plans allow for hardship withdrawals, including those made for purchase of a home or to cover medical or college costs.

How your 401(k) plan stacks up against these averages can have a real effect on whether you meet your retirement savings goals. If your plan is better than most, count yourself fortunate. If it's worse than most, consider talking to your employer's human resources department and pointing out its shortcomings. If this doesn't help, consider redirecting some of the funds you would normally feed to your 401(k) to an IRA (after you've contributed enough to get the company match--no sense in turning down free money). That way you can choose funds that better meet your investing goals.