Seven signs your 401(k) is underperforming

An underperforming 401(k) is a missed opportunity and lost money. Use these tips to make sure your 401(k) is doing the most work it can.

You've been diligently putting money away through your company's retirement plan, and are hopeful that the mutual funds in your 401(k) will accumulate enough cash for you to retire comfortably some day. But how do you know if your account is performing as well as it could?

An underperforming 401(k) can cost you thousands of dollars in retirement income, so it's important to understand where it may be lacking.

Here are seven ways to tell if your 401(k) is not up to snuff.

1. The Underlying Indexes Are Performing Better

You may have your 401(k) invested in funds that are meant to mirror certain indexes, such as the S&P 500 or Russell 3000. In general, your overall investment returns should be in line with these indexes. If they aren't, then you may want to evaluate what you are paying in fees (see below), or consider switching to a fund that is better managed.

2. You've Never Rebalanced

You may think you have the ideal investment mix, but it's important to remember that your original investment choices may have shifted in proportion over time due to your portfolio's growth. For example, let's say you decided to place 60% of your money in domestic stocks, and 40% in international. But if domestic stocks grow more quickly, over time, that may turn into a 70/30 split. Reallocating your existing investments to reflect your investment choices will usually help you achieve greater growth.

3. You Pay a Lot in Fees

Many people don't realize that most 401(k) plans come with fees. There are fees to administer the plan, fees to manage the funds, fees for record keeping, and a variety of other things. Generally speaking, fees should not represent more than $1 for every $100 in your account, or a total of 1%. If you are primarily invested in index funds, anything more than .20% is high. Even the slightest fee can represent thousands of dollars in lost savings over the life of a plan.

4. Your Plan Administrator Uses Only Its Own Funds

If the company administering the 401(k) plan insists on offering only its own funds, that could be a problem. Those funds might be fine, but studies show they are often not the best funds available and administrators are less likely to dump those funds when they underperform.

5. You Aren't Getting the Maximum Match From Your Employer

If you're not certain what percentage of each paycheck to put into your 401(k), you should at least contribute the minimum required for your maximum company match. This amount varies, but it's often between 3% and 5% of your salary. If you don't take advantage of the company match, you're leaving free money on the table.

6. You're Trying to Time the Market

One of the best things about 401(k) plans is that money is usually deducted straight from your paycheck, so you can contribute a consistent amount into specific funds without much work. But if you decide to adjust your contributions according to market fluctuations, you might be messing with a good thing. Trying to time the market is rarely effective. The average 401(k) investor hangs on to investments for about three years, when they should be staying the course for at least five.

7. You Live in the South

If you live below the Mason-Dixon Line, you might find that your 401(k) is a little sluggish. According to BenefitsPro, six of the top 10 states with the most underperforming 401(k) plans are located in the south. This includes Alabama, Mississippi, Tennessee, South Carolina, Georgia, and Florida. In many of these states, more than 10% of all plans were considered low performing. Check with your HR department or plan administrator for a better understanding of your investment choices.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website.