Employer-sponsored 401(k) plans can be a great way to save for retirement, but some plans are better (or worse) than others. Though your employer has a fiduciary duty to provide well-chosen investment options for your 401(k), and a responsible employer will try to keep the fees you pay to a minimum, some plans have both limited options and high fees. In this guide, we'll explain how to assess your 401(k) plan, how to try to improve it, and what to do if you're stuck with a less-than-ideal one.

How To Assess Your 401(k) Options

The first step, if you suspect your company's 401(k) is subpar, is to see if you're right. Initially, focus on the fees you are paying. Fees can make a huge difference in how much money you'll have accumulated in your plan by the time you're ready to retire.

In addition to any administrative fees that your plan charges, each of your investments will carry its own fees. These fees are expressed as an expense ratio and can be found on your annual account statements. If you are paying more than 1% a year, especially for standard types of investments like large-cap stock mutual funds, you may have a high-cost plan.

You should also look at the range of investment choices your plan offers. Employers are wary of including too many high-risk options in their 401(k) plans, but some take this too far. If your plan is lacking solid options for standard types of investments, this can also be an indication that your plan is not as good as it could be.

If you find that your plan is not up to scratch after completing this research, your first step should be to talk with your employer or HR department. Be as specific as possible with your criticisms of your 401(k) and ask them to address your concerns. Some employers are open to feedback like this and it may improve the plan for everyone.

Making the Most of a Bad 401(k)

If your employer can't or won't improve your 401(k), you may be tempted not to participate at all. However, if your employer offers a matching contribution as part of your plan, it's almost always worth taking advantage of this. No matter how high the fees on your 401(k) are, it's unlikely they will be more costly than the benefit you'll receive from a matching contribution. Financial planners typically advise contributing at least enough to your plan to get the full employer match.

There are also a number of ways of investing wisely, even in the most limited 401(k) plans:

• Minimize your fees by choosing low-cost index funds if your plan offers them.
• Diversify outside of your 401(k) plan. In most cases, you should try to build a well-diversified 401(k) portfolio. However, if your 401(k) is missing a good option in a major asset class (foreign stocks, say), you can invest in that elsewhere to achieve the overall balance you want. 

Going Beyond Your 401(k)

As we've mentioned, even if your 401(k) isn't as good as it could be, you should usually try to contribute enough to maximize your employer's matching contributions by using the best investment options available through your plan. However, you may be lucky enough to be able to save more for retirement, and if your 401(k) is not great, you might want to invest outside of your employer's plan.

There are several options open to you. The best place to start, for most investors, will be an individual retirement account (IRA). An IRA offers similar tax advantages to a 401(k) plan, but you'll have much broader options when it comes to choosing your own investments. One drawback is that the contribution limits for IRAs are much lower than those for 401(k) plans.

The second option could be to fund a health savings account (HSA) if you have a high-deductible health plan. HSAs have similar tax advantages to 401(k)s and IRAs, and while the money must be used for qualified health expenses, you don't have to spend it right away and can use it to cover your health-related costs in retirement.

Finally, you might consider saving for retirement via a regular mutual fund or brokerage account. The disadvantage of this route is that you'll lose many of the tax advantages of a 401(k), IRA, or HSA. The advantage—if your 401(k) is bad—is that you might pay far lower fees. You'll also have an almost limitless number of investment options.

The Bottom Line

Not all 401(k) plans are created equal. Some have high fees while others may severely limit your investment options. If either applies to your 401(k), you should talk to your employer and ask them to improve your plan. If you are stuck with a bad 401(k), you should generally still contribute enough to take full advantage of your employer's matching contributions, if any. After that point, you may want to invest elsewhere, such as in an IRA or HSA. If you reach your contribution limits with those options, you can consider saving for retirement via a regular investment account but you'll lose the tax advantages of a 401(k).