Why Your 401(k) Might Be Underperforming and What You Can Do About It

A 401(k) is a cornerstone of retirement planning, but many investors find their accounts underperforming expectations. If your 401(k) balance isn’t growing as quickly as you’d like, there could be several reasons why. Fortunately, understanding these issues can help you make strategic adjustments to get your retirement savings back on track.

Common Reasons Your 401(k) Is Underperforming

1. High Fees and Expenses

Many 401(k) plans come with hidden fees, including administrative costs and high expense ratios on mutual funds. Even seemingly small fees can erode your returns over time.

What You Can Do:

• Review your plan’s fee disclosure statement.

• Opt for low-cost index funds where possible.

• Consider rolling over to an IRA if your employer’s plan has excessive fees.

2. Poor Investment Choices

Your asset allocation and fund selection play a crucial role in performance. Many investors either take too much risk or not enough, leading to suboptimal returns.

What You Can Do:

• Reassess your portfolio allocation based on your risk tolerance and retirement timeline.

• Diversify your investments across different asset classes.

• Consider a target-date fund if you prefer a hands-off approach.

3. Lack of Regular Rebalancing

Over time, market fluctuations can throw your portfolio’s allocation off balance, leading to a riskier or more conservative mix than intended.

What You Can Do:

• Review your 401(k) holdings at least annually.

• Rebalance your portfolio as needed to maintain your desired asset allocation.

4. Not Maximizing Employer Matching

If you’re not contributing enough to get your full employer match, you’re leaving free money on the table.

What You Can Do:

• Contribute at least enough to receive the full employer match.

• If possible, increase contributions over time to maximize tax-advantaged growth.

5. Market Volatility and Economic Conditions

Market downturns can temporarily reduce your 401(k) balance. However, panicking and making rash investment decisions can lock in losses and hurt long-term performance.

What You Can Do:

• Maintain a long-term perspective and avoid emotional investing.

• Stay diversified to mitigate risk.

• Consider increasing contributions during downturns to take advantage of lower stock prices.

6. Not Contributing Enough

Many people contribute only the minimum required to get an employer match but don’t save enough to meet their retirement goals.

What You Can Do:

• Increase contributions whenever possible, aiming for at least 10-15% of your income.

• Take advantage of catch-up contributions if you’re over 50.

Conclusion

If your 401(k) isn’t performing as well as you’d like, don’t ignore the problem. Identifying the underlying issues and making adjustments can significantly improve your long-term financial security. By minimizing fees, optimizing your investment strategy, and contributing more, you can ensure your 401(k) works harder for your retirement.

Taking proactive steps today can make all the difference when it’s time to retire. Start reviewing your plan now and make the necessary changes to secure a more comfortable future.