7 Signs Your 401(k) Is Quietly Underperforming

A 401(k) balance that looks healthy on paper can still be quietly shrinking in real terms, and most account holders never notice until years have passed and the compounding damage is already done. The cause is usually structural problems inside the account that build quietly over the years. Here are seven signs yours may be one of them.

The Fee You’re Paying Is Higher Than It Should Be

The benchmark for low-cost index investing is now almost zero. Examples like the iShares Core S&P 500 ETF (NYSEARCA:IVV) carry an expense ratio of 0.03%, so if your 401(k) holds index-style funds charging more than 0.5%, you are paying far more than necessary for the same market exposure.

The dollar cost is not trivial, as a $100,000 investment at a 7% gross annual return can grow substantially over 20 years at near-zero fees, while a 1% expense ratio meaningfully reduces that outcome, a gap that widens on a single position.

Your Lineup Is Dominated by Active Funds

Actively managed funds charge more and, over long periods, most underperform their benchmark indexes after fees. If your 401(k) menu shows mostly fund names with words like “Growth,” “Opportunity,” or “Select” rather than “Index” or “S&P 500,” your plan may be steering you toward higher-cost products. Check each fund’s expense ratio in the plan’s fee disclosure document, which your employer is required to provide annually under ERISA.

You’re Still in the Default Option

Employees who never make an active investment election are placed in their plan’s default fund, which is usually a target-date fund. With the federal funds rate now at 3.75% after three Fed cuts in the past year, money market yields have been declining. The 10-year Treasury yield sits near 4.4%, while the S&P 500 has returned about 14% over the past 12 months. Staying in a low-yielding default option while equity markets compound is one of the most expensive passive decisions a retirement saver can make.

You Haven’t Rebalanced in Three or More Years

A portfolio that started at 70% stocks and 30% bonds in 2021 looks very different today after the S&P 500 has gained 69% over five years. Without rebalancing, your equity allocation has likely drifted well above your intended target, leaving you with more risk than your plan assumed. Rebalancing simply means selling some of what has grown and buying more of what has lagged, so your account stays aligned with how much risk you actually intended to carry into retirement.

Your Target-Date Fund Is From a High-Fee Provider

It’s important to remember that not all target-date funds are not created equal, as the same 2035 target-date fund from a high-fee provider can charge 0.6% to 0.8% annually, while Vanguard or Fidelity index-based equivalents charge under 0.15%. Over a 20-year horizon, that difference on a $500,000 balance compounds into a six-figure gap. Pull up your target-date fund’s ticker, find its net expense ratio, and compare it to the lowest-cost option in your plan.

More Than 10% of Your Balance Is in Company Stock

This warning is one that employees at Enron, Lehman Brothers, and dozens of other companies learned the hard way. A concentrated position in your employer’s stock means your income and your retirement savings face the same single risk. If the company struggles, you may face a layoff and a decline in your portfolio simultaneously. A common guideline is to keep employer stock below 10% of a retirement account balance, and some advisors argue that 5% is better. If you go with 10%, anything above that number indicates a structural vulnerability that no amount of fund selection elsewhere in your account can fully offset.

You’ve Never Looked at What Else Is Available

Most 401(k) participants invest in whatever funds appear at the top of the menu and never look further. While many plans offer 20 to 30 options, low-cost index funds are often buried at the bottom. Under ERISA, your employer has a fiduciary duty to provide prudent investment choices with reasonable fees. If your plan only offers high-cost “active” funds, your employer may be at risk of a legal breach. Bring this up with your HR department, sometimes just asking for a “passive index option” is enough to trigger a plan review.

The S&P 500 has returned roughly 235%-260% over the past decade, depending on the source. A well-constructed, low-cost 401(k) should have captured the lion’s share of that growth. If yours hasn’t, these seven signs tell you where to look first.

Three Steps to Take This Week

1. Pull your plan’s fee disclosure document and find the expense ratio for every fund you hold. Flag any index-style fund charging more than 0.5% and identify the lowest-cost alternative in your plan.
2. Check your current allocation against what you originally elected. If your equity percentage has drifted more than 5 percentage points from your target, rebalance now rather than waiting for an annual review.
3. If your combined household income is near the IRMAA threshold (check the current IRS figure for your filing status) and you are within two years of Medicare eligibility, consult a fee-only advisor before making large account changes. The IRMAA surcharge system uses a two-year lookback, meaning decisions made today can increase your Medicare premiums in retirement.