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Signs that your 401(k) really stinks

If you're starting to get the nagging feeling you should pay more attention to your 401(k) plan, do.

In the past five years, worries about Americans' preparation for retirement have resulted in more people looking critically at the plans that have become the bulwark of American's retirement system. There have been headlines, as employees have sued their companies over which mutual funds are included in the plans, and more disclosure, as the Labor Department tries to use sunshine to shrink the sometimes-high fees.

About 61 million people participate in the almost 514,000 401(k)-type plans, according to the department. There's now close to $4 trillion in 401(k) plans specifically, according to recent Investment Company Institute data. Yet all participation isn't created equal.

"401(k)s are a real bear trap for millions of Americans," said Charley Ellis, consultant to large institutional investors and governments and a former chairman of Yale University's investment committee. Participating in a 401(k) may lull people into a false sense of security—once they start contributing, they think they've got it covered. Yet some plans offer very little support to help people decide how much they need to save, or what their goals are. "Rather than continuing to invest, people look at the money they've got and think, 'It's got to be enough,'" Ellis added.

(Read more: The most widely held stock in 401(k) plans is ...)

A small percentage of plans are actually fraudulent. The Department of Labor offers a list of 10 signs of 401(k) misuse. But most Americans probably should worry more about whether their plans are mediocre—in terms of the support offered, the investment choices and the fees. Here are six signs that that you should not sit back and be satisfied with what your company is offering as a retirement plan.

Steve Bronstein | Photographer's Choice | Getty Images
"401(k)s are a real bear trap for millions of Americans. Rather than continuing to invest, people look at the money they've got and think, 'It's got to be enough.'" -Charley Ellis, Institutional investor consultant, former chairman of Yale University's investment committee

Your plan doesn't offer a match

The top reason to be in a 401(k) plan rather than an IRA is that it offers a company match. A match usually outweighs any benefit you get from other plan features, such as low fees or good investment choices. According to the 2011 Annual Plan Sponsor Council of America Survey, 95 percent of plans offer a match; the average in 2011 was 2.5 percent of pay. Company matches are free money; if your company is among the 5 percent that don't offer one, ask why, and consider switching to an IRA, where the costs are likely to be lower and the investment choices better.

Your plan doesn't offer an index fund

Most experts agree that the foundation of your retirement savings is a low-cost index fund, because, over the years, the amount you save on the lower fees in an index fund will outweigh any higher returns of an actively managed fund. Actively managed funds in core equity asset classes have also had a difficult time beating the index returns over the long run. The good news is that the percentage of plans offering at least one index fund is 83 percent, according to data from San Diego-based BrightScope, a website that provides extensive 401(k) information. "That has gone up substantially in recent years," said Mike Alfred, co-founder and CEO. If your plan is among the 17 percent without even one index option, time to ask tough questions.

(Read more: The new retirement age is ... never)

Your plan subtly encourages too many funds, and actively managed funds

401(k) plans offer investment options, typically mutual funds, from one or more investment companies. These asset managers make more money from actively managed funds than index funds. The way the retirement plan marketing materials are presented may subtly encourage you to invest in too many funds and/or those with higher fees. Behavioral economics research shows that the more choices you are given, the more likely you are to make incorrect choices. The 2011 Annual Plan Sponsor Council of America Survey showed the average 401(k) plan had 17 options; academics think far fewer is better.

Also take a look at whether your 401(k) plan offers funds from companies other than the recordkeeper—that's the company that manages your plan and will have its name stamped all over the marketing materials. Open architecture—offering investment choices from other fund companies—is one sign of a "best in breed" plan designed with the investor's best interest at heart, rather than a plan designed to keep all of the assets in the hands of the recordkeeping company.

Your plan hasn't kept up with the latest thinking on enrollments


About 50 percent of plans automatically enroll participants, according to the Boston-based Center for Retirement Research, and good plans put enrollees into low-cost lifecycle or target date funds. Top-notch plans also automatically increase your contributions as your salary increases. Those kinds of changes help people achieve retirement security; if your plan administrator hasn't kept up with the latest research on enrollments, there's a chance there are other flaws in the plan, too.

Low participation rate

You can find some information on participation rate on BrightScope; you can also ask your company's human resources department. If your plan has automatic enrollment, look for a participation rate of more than 90 percent. If it doesn't "look for at least north of 50 percent," said Alfred. If the participation rate is low, ask what your fellow workers know that you don't.

(Read more: The best retirement investment you can't have)

High fees?

There are three kinds of fees in a 401(k) plan: administrative fees, fees on the underlying investments and fees such as those charged for taking out a loan against your account. Fees are important, but to judge the quality of your plan, you need to compare your 401(k) to other plans of its size. BrightScope enables some of those comparisons. After new Department of Labor regulations requiring companies to disclose the fees in 401(k) plans, you should receive fee disclosure statements about the fees in your plan.

A study by the Alexandria, Va.-based Society for Human Resource Management found that in 2012, the average all-in fee for small plans was about 1.5 percent and the average for large plans was just above 1 percent. This is an important distinction: if you are a participant in a small plan you can't expect the same fee level as participants in a large plan—economies of scale work to the advantage of plans with more assets under management. So you have to do an apples-to-apples fee comparison based on plan size, as well as services offered—even if you don't use every one of those services.

If you want to drill down even deeper, compare how much your 401(k) plan charges for an S&P 500 Index portfolio—which should be the most competitively priced—versus the management fee on Vanguard Group's S&P 500 fund, which is at at 0.17 percent.

So now what?

If your plan shows a number of the signs above, you have two choices: put your retirement savings into an IRA or a Roth IRA—that's usually a good choice, but only if your company doesn't offer a match. You can set up automatic deductions to keep your contributions flowing. Your other choice is to keep your money in the 401(k), organize your fellow employees and try to effect change—something the recent Department of Labor 401(k) disclosure requirements are intended to spur you to do.

It's getting easier to do that, too: online financial planning sites allow you to analyze 401(k) fees and then send an email directly to your company letting them know the 401(k) offering they've provided doesn't measure up to the competition. The jury is still out on how effective that measure is if you don't already have a good relationship with your company's HR department or CEO, but in the least, it's a step in the right direction of trying to have your voice—and the voice of all the others comprising the $4 trillion in 401(k) assets—heard.

By Elizabeth MacBride, Special to CNBC.com

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