5 Signs Your 401(k) Plan Is Underperforming

Most business owners set up their 401(k) plan, hand it off to a provider, and assume everything is running smoothly. But without regular oversight, plans can quietly drift into territory that costs your employees real money and exposes you to unnecessary fiduciary risk.

Here are five warning signs that should prompt an immediate review of your plan.

1. You Haven't Benchmarked Your Fees in Over a Year

Retirement plan fees aren't static. The industry has seen significant fee compression over the past decade, which means the rate you agreed to three years ago may be well above what's available today for a plan of your size.

A proper fee benchmark compares your plan's total cost — including investment expenses, recordkeeping fees, advisory fees, and any revenue sharing arrangements — against comparable plans. If you can't remember the last time this was done, that's your first red flag.

As a fiduciary, you have a legal obligation to ensure fees are reasonable. “We've always used this provider” is not a defensible position if those fees turn out to be excessive.

2. Your Fund Lineup Hasn't Changed in Years

Markets evolve. Fund managers change. Performance shifts. A fund that was a strong choice five years ago may be underperforming its benchmark today. If your plan's investment menu looks exactly the same as it did when you set it up, it is likely that no one is actively monitoring it.

Proper investment oversight means monitoring the fund lineup on a regular, disciplined schedule: evaluating performance against benchmarks and peers, checking for management changes, and replacing funds that consistently underdeliver. This isn't about chasing returns. It's about maintaining a disciplined, evidence-based process.

3. Participation Rates Are Low

If a significant portion of your eligible employees aren't participating in the plan, something is wrong. Low participation can signal several issues:

• Poor plan design:Without automatic enrollment, employees have to opt in — and inertia works against participation.
• Lack of education:Employees who don't understand the plan or feel overwhelmed by choices are less likely to enroll.
• Inadequate match:If the employer match isn't competitive, employees may not see enough incentive to participate.

Low participation doesn't just hurt your employees — it can also cause your plan to fail nondiscrimination testing, which creates compliance headaches and may force refunds to highly compensated employees.

4. Your Advisor Doesn't Serve as a 3(38) Fiduciary

There's a critical difference between an advisor who recommends investments and one who takes legal responsibility for selecting them. A 3(21) advisor gives you suggestions; you make the final call and retain the liability. A 3(38) investment manager makes the decisions and assumes the fiduciary responsibility.

If your advisor operates under a 3(21) arrangement — which is the case for many 401(k) advisors — you and your investment committee bear the legal risk for every investment decision. In an era of increasing DOL scrutiny and rising litigation against plan sponsors, that exposure is worth taking seriously.

5. You Can't Clearly Explain Your Plan's Fee Structure

This is perhaps the most telling sign. If you, as the plan sponsor, can't articulate exactly what your plan costs and who gets paid what, your plan almost certainly has transparency issues.

A well-managed plan has a fee structure that can be explained in plain English: here's what the investments cost, here's what the recordkeeper charges, here's what the advisor is paid, and here's the total. If your provider can't — or won't — break it down that clearly, it's worth asking why.

What to Do Next

If any of these signs sound familiar, it doesn't necessarily mean your plan is in crisis. But it does mean you should take a closer look. A comprehensive plan audit can identify exactly where your plan stands and what changes would benefit your participants.

The cost of inaction compounds over time — just like investment returns, but working against your employees instead of for them. A 15-minute conversation is all it takes to start understanding where your plan stands.

Source: EBSA Restores $1.4 Billion to Employee Benefit Plans, Participants, and Beneficiaries (FY 2025) — U.S. Department of Labor.