Avoiding a Malfunctioning Vehicle Contribution Impacting Your Retirement Savings
In a recent analysis of 58,300 U.S. 401(k) plans from 2015 to 2025, it was found that more than 99% of plans offer at least one overpriced and underperforming fund over three-, five-, and 10-year periods. Over 70% of plans contain at least 10 such expensive laggards over three- and five-year spans, and 43% have 10 of these underperformers over a period of 10 years.
High fees can eat into savings in a 401(k) account, reducing the potential wealth. These funds often have high fees and lag the market despite the availability of cheaper, better-performing alternatives.
To identify overpriced and underperforming funds, it is recommended to review fund performance relative to benchmarks over multiple time frames, examine fees and expenses carefully, compare the fund's performance and fees to similar options, consult independent reports and analyses, and keep abreast of legal cases and regulatory scrutiny concerning fiduciary duty breaches related to these funds.
To avoid these funds, investors can use fund comparison tools, favour index or passive funds, consider working with a financial advisor, and watch out for "clunker" funds regularly flagged in analyses, advocating for plan sponsors to remove persistently underperforming options.
Choosing low-cost, well-diversified index funds can help 401(k) plan participants avoid underperforming funds and mistakes that could lead to lost investment opportunities. A good 401(k) plan should offer a variety of low-cost investment options for a well-diversified, all-weather portfolio. However, costs still matter, and a high expense ratio can indicate a less desirable fund.
Historical data show funds run by stock pickers also post lower returns than the benchmarks they track over time, in large part due to fees eating into returns. Passively managed index funds are widely available and cost below 0.10%, according to the Abernathy Daley 401(k) Consultants' study.
For example, a $500,000 investment in Fund X with a 0.45% fee and a 7% annual return would be valued at $3,306,813 after 30 years, while an investment in Fund Y with a 0.08% fee and the same return would be valued at $3,806,129, resulting in a total loss of $499,316 due to fees and underperformance.
The key benefit of a 401(k) account is its ability to grow wealth with the help of compounding. However, it is crucial for 401(k) savers to scrutinize the funds in their 401(k) plan more closely to ensure they are selecting funds that give them the best chance of amassing a big nest egg.
The cost of the funds you're investing in is very important, according to David Schneider, a certified financial planner and president of Schneider Wealth Strategies. Retirement savings accounted for 34% of all household financial assets in 2025, and American workers had $12.2 trillion invested in defined contribution plans at the end of March 2025.
The downside to "suboptimal" fund options is that employees lose a significant amount in potential retirement savings. The report authors blame the weakness in 401(k) fund lineups on the inclusion of actively managed funds, which charge higher expense ratios than passive index funds.
Academic research shows it is impossible to determine which actively managed fund will outperform an index fund in any given year or period, according to the Abernathy Daley report. Jamie Cox recommends considering index funds such as Vanguard S&P 500 Index Fund (VFIAX) and Fidelity Total Market Index Fund (FSKAX) due to their low expense ratios of 0.03% and 0.015%, respectively.
In conclusion, by being vigilant and proactive about identifying and avoiding overpriced and underperforming funds in 401(k) plans, investors can protect their retirement savings and ensure they are making the most of their investment opportunities.
- To protect personal-finance and secure a larger retirement nest egg, investors should be proactive in identifying overpriced and underperforming funds in their 401(k) plans, as high fees can eat into savings over time, even when the funds lag the market.
- In the realm of investing and personal-finance, choosing low-cost, well-diversified index funds is crucial for 401(k) plan participants to avoid underperforming funds and potentially lose investment opportunities, as these low-cost funds offer a better chance of amassing a big nest egg compared to high-fee, actively managed funds.
