The Biggest Red Flags Lurking in Americans' 401(k) Plans

"When many investors put part of their paycheck into their 401(k) plan on a consistent basis, that's the end of the thought process. The idea is that money magically disappears into a long-term savings and investing vehicle, and when one retires, the growth one should see over their lifetime should be at least close to that of the overall market."

"The thing is, investors may be placed in company-specific funds set up by various 401(k) providers such as Vanguard or Schwab, with target-date funds and other offerings making up a significant portion of where employee savings go. These funds may have different portfolio structures than investors would otherwise like to see (some may want to simply own index ETFs or have a certain allocation to specific stocks), but depending on the provider, picking individual stocks or specific ETFs may not be possible."

"Indeed, many 401(k) plans offer a limited range of investment choices , often confined to the aforementioned list of specific target-date funds or provider-owned index funds. Some plans only offer a handful of options, while others are more liberal, so taking a look at what one's options are and re-allocating where one's paycheck is invested is a key step when starting out in the process (and doing so periodically can be a good move as well, since the breadth of offerings can change over time)."

Many 401(k) plans restrict employee choices to provider-managed options like target-date funds and proprietary index funds. Some plans allow more flexibility, but others limit selections to a handful of funds and may prevent picking individual stocks or specific ETFs. Employees should review available options and reallocate contributions accordingly, since plan offerings can change over time. Consulting a financial advisor can identify supplemental vehicles such as IRAs to address gaps left by limited 401(k) menus. Employer matching contributions can boost retirement savings but often involve vesting schedules and percentage caps that affect the ultimate benefit.

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