My 401(k) Options Are Bad

The situation

Your workplace plan has high expense ratios, no broad index option, a plan administration fee, or some combination of the three, but the tax advantages and employer match may still make it useful.

The three-step answer

1. Capture the full employer match. Contribute enough to receive the available match, then choose the best usable option inside the plan. Even limited menus often include one decent choice, such as a low-cost broad-market or S&P 500 index fund. Use Employer matching, Choosing funds in your 401(k), and Why fees matter to compare the match with the costs.
2. Fund an IRA next. After securing the match, direct the next retirement dollars to an IRA if you are eligible and it gives you lower costs or a clearer diversified approach. Follow How an IRA works, Traditional vs. Roth IRA, and IRA contribution rules for the account decision.
3. Come back to the workplace plan. Once the IRA step is handled, use the 401(k) again for additional retirement saving rather than adding complexity for its own sake. Return to The order of operations for your money and use Why simplicity wins to keep the combined portfolio manageable.

Why this order

The tradeoff is that a weak plan can charge more or offer less choice, while skipping a match leaves part of your compensation unused. Capture the match first because its value can outweigh imperfect fund choices and plan-level fees.

An IRA comes next because it can give you control over the provider, investments, and account costs. The 401(k) returns after that because a limited menu can still serve a clear savings purpose when you have already taken the match and used the better options available elsewhere.

Change the order if there is no employer match. In that case, the IRA may come before the 401(k), depending on eligibility, costs, and the rest of your financial position. Use I Don’t Know Which Account to Fund First to route that choice.

Go deeper

• How a 401(k) works
• What is an index fund?
• Target-date funds
• Asset allocation
• The cost of complexity