(MONEY Magazine) – Not that long ago, few people were attached to the idea of the 401(k) company savings plan. Now the plans are as much a part of corporate America as casual Fridays--and even more beloved. Many grateful employees have come to view their accounts as magic moneymaking machines. Consider: By stashing part of your paycheck in a 401(k), you get three lucrative benefits--an instant tax deduction, a matching contribution from your employer (usually) and tax-deferred growth for your investments. What could be wrong with that?

We agree that 401(k)s are great. But we also think that many plans could be a whole lot better. The heart of the problem is that when you enter a 401(k) plan, you give up control of your money. We're not talking about the ultimate disaster--when a badly run plan goes broke, wiping out the retirement savings of hard-working employees. (Turn to "Broken Dreams," which begins on page 80, for the tale of one such debacle.) We are talking about well-regarded employers and plan providers, who--for a variety of reasons--fill 401(k)s with decidedly mediocre investment options. Many, if not most, employees are stuck with too few choices and too little information to make those choices. And the impact of subpar investment results over, say, a 30-year career can be staggering.

It all starts with the way 401(k)s are designed and administered. Your company, inevitably, is trying to spend as little as possible in sponsoring a plan. Providers of these plans, understandably, are focused on turning a profit. The perspective of the plan participants can get lost in the shuffle. As 401(k) analyst Kathleen Hartman of Chicago investment firm Morningstar explains, "401(k) participants are responsible for their own financial security, but they have no control over the structure of their plans."

Now, it may seem churlish to complain about something as generous as the 401(k), which provides retirement benefits to millions of employees who otherwise might not have any. "Except in rare cases, even a bad plan is a lot better than none," says David Godofsky, principal at Bryan Pendleton Swats & McAllister, a Nashville benefits consulting firm. We agree completely.

On the other hand, with so much money being invested in the plans, the shortcomings of a middling 401(k) can prove significant. Today more than 25 million workers have $1 trillion stashed in their 401(k) accounts, according to Spectrem Group/ Access Research, a financial services consulting firm based in Windsor, Conn. The average balance is a substantial $35,000, and 10% of accounts hold $100,000 or more. With numbers that large, the costs of a less than perfect plan become magnified. Say you earn $70,000 a year and stash 8% in a 401(k) that includes a modest employer match. Over 30 years, earning a return of 6% annually rather than 8% could leave you with $936,000 instead of $1.3 million, or 25% less.

We are not claiming that your company or the plan providers are doing anything evil with your 401(k). They are simply approaching these plans as one piece of their business. You have to be just as businesslike to protect your interests. What follows is a hard look at the common ways that 401(k) plans may be letting you down, as well as advice on how to persuade your company to upgrade its plan. Finally, in the box on page 78, we detail moves you can make with any 401(k) to help you get the highest possible return on your savings.

LIMITED CHOICES, POOR RETURNS

As a plan participant your needs are pretty simple: a range of top-performing options representing different asset classes and investment styles. Chances are, though, you won't spot that All Star lineup in your 401(k). A telling example: Four out of 10 plans don't have the basic portfolio building block, a stock-index fund. "Many companies, especially small and mid-size firms, lack the expertise to evaluate funds," says Peter Starr, a consultant with Cerulli Associates, a Boston market research firm. "So they simply take what the fund company is pushing or what their investment adviser recommends."

Even among large companies, that often means big, brand-name funds from families such as Putnam or T. Rowe Price. But a household name is no guarantee of good performance. As the table below shows, most popular 401(k) funds have failed to keep pace with Standard & Poor's 500-stock index over the past three years. While funds in general have tended to lag the S&P, brand-name 401(k) funds often face a special handicap: swelling asset size. When a fund is available in a large number of 401(k) plans, it begins mainlining cash, sometimes millions of dollars a day. Having to put that much money to work all but forces fund managers to load up on the biggest blue-chip stocks. "As 401(k) portfolios grow, they tend to become expensive index funds," says Scott Lummer, chief investment officer at 401(k) Forum, a San Francisco consulting firm. "Inevitably performance gets dragged down."

Won't the people sponsoring your 401(k) plan be quick to dump poor or inconsistent performers? After all, under the law governing retirement plans, the Employment Retirement Income Security Act (ERISA), employers have a fiduciary responsibility to provide sound investments to their employees. But that doesn't mean they have to provide the best investments, which is precisely what you want. Then there are bureaucratic concerns: "Human-resources execs are often hesitant to get rid of funds for fear of upsetting employees who chose them," says Gary Blank, a San Francisco pension consultant. Ted Benna, a pension consultant in Cross Fork, Pa. and inventor of the 401(k) plan, adds that "companies are worried about potential [legal] liability, since there's a fifty-fifty chance that if they drop a fund it may go on to outperform the substitute."

Plan sponsors may also be reluctant to sever ties with a company that provides reliable administrative service. "Fidelity has such a wonderful image and high level of service that sponsors forgive a lot in terms of performance," says Jim Klein, a principal with Towers Perrin in New York City.

One sign that companies may be putting convenience ahead of performance: Some 40% of plans restrict their offerings to a single fund family. That makes life easy for the administrators but not for you. In many fund families, the managers follow a similar investing style and often hold the same stocks. "There's no way you can have across-the-board, above-average performance if you stick with one family," says Dan Maul, president of Retirement Planning Associates, an investment advisory firm in Kirkland, Wash.

Some company officials contend that having too many choices can be as much a problem as having too few. We're skeptical of that reasoning. Investors seem to have no trouble discriminating among the many fund and individual stock and bond options outside their 401(k) accounts. And we're convinced that the need for more and better investing vehicles will only increase as plan participants have more money to put to work.

YOU'RE IN THE DARK

All the choices in the world won't help you if you don't have the information you need to make sound decisions. As a conscientious investor, you want to know key facts--for example, the background of the fund manager or the specific stocks in the portfolio--before handing over your money. But when you invest via a 401(k), you can find it difficult, if not impossible, to get that data. If your plan offers retail mutual funds, you probably won't automatically get quarterly or annual reports--which are the only documents that provide data on portfolio holdings--but they are usually available on request. If, however, your plan offers institutional funds, which are not open to the general public, things get a lot sketchier. Institutional funds don't issue prospectuses, and you can't track their performance in the newspapers. That is also true with annuities, sold by insurance companies mainly to smallcompany plans.

Some plan providers now deliver updated returns and portfolio holdings via the Internet. And several firms are gearing up to offer computerized advice programs to 401(k) participants based on the cutting-edge investment information available to professional money managers. But Stacy Schaus, a principal with benefits firm Hewitt Associates, says expense and bureaucratic concerns make companies reluctant to introduce these new programs: "No one wants to be the first one to do it."

FEES KEEP CLIMBING

We've said this several times before--most recently in our April 1997 story "Protect Yourself Against the Great Retirement Rip-Off"--but it bears repeating: Fees on many 401(k)s are excessive and are often not even disclosed. MONEY's story sparked hearings on the issue by the U.S. Department of Labor last November. The agency will soon publish a booklet for consumers to alert them to 401(k) fees. And the Labor Department is continuing to study the need for improved fee guidelines for plan sponsors and providers. In March, Securities and Exchange director Barry Barbash announced that he is examining the effects of money-managementfirm consolidation on mutual fund fees, including those in 401(k) plans.

Meanwhile, 401(k) expenses continue to rise. In a recent survey, HR Investment Consultants, a Baltimore firm, found that the average total expenses for a 401(k) plan with 100 participants crept up from 1.3% of assets to 1.37% in just the past year; average costs for a plan with 1,000 participants edged up to 1.14% from 1.12%. "Employers who have not been paying attention," says Joseph Valletta, a principal with HR Investment Consultants, "may be surprised to find out how much fees have increased."

YOU GET TOO MUCH COMPANY STOCK

If your 401(k) includes your employer's stock, as do about 40% of plans, you probably don't realize just how big a chunk you own. On average, employees with a company stock option or match in their plans hold a hefty 33% of their account balances in that single investment. That percentage may well be far higher, especially among companies that match in their own stock, or when the 401(k) is a converted profit-sharing plan. For example, in Abbott Lab's 401(k), which was combined with a profit-sharing plan, company stock accounts for 88% of assets, according to the Institute for Management & Administration, a New York City research firm. (At MONEY's parent company, Time Warner, 40% of plan assets are held in employer stock.)

Pension experts and investment advisers urge you to keep no more than 10% of your portfolio in your employer's stock. "By owning company stock in your plan you are tying both your retirement security and your job to your employer," says Shlomo Benartzi, a business professor at the University of California at Los Angeles.

Of course, some employees have reaped a fortune with company stock. For example, at Coca-Cola Enterprises, where 75% of 401(k) holdings are in the stock, participants saw a lofty gain of 120.7% last year, according to IOMA. But at Owens-Corning, where employer shares make up 64.6% of 401(k) assets, participants suffered a stock price tumble of 19.4%. And Hanson Industries workers, where company stock accounts for 43.5% of plan assets, watched the share price plunge a stunning 56.8% in 1997. "Participants don't understand how risky their employer's stock can be," says Benartzi. Companies that want to address this problem, he adds, "must actively discourage employees from buying the stock."

YOU HAVE TO WAIT A YEAR TO JOIN

The only thing worse than having a poorly designed 401(k) plan is not being allowed to save in it. Remember, even if your funds are dogs, you still have the benefit of tax deferral on your savings and probably a company matching contribution. Right now some 96% of companies with 401(k)s require you to wait from several months to as long as a year before you can join. With the average employee changing jobs six times during a working lifetime, that can take a toll. Notes Sean Hanna, editor of 401k Wire, an online trade publication: "If you miss six years of saving, it's much more difficult to build the nest egg you need."

Here again, companies may simply be trying to avoid paperwork hassles, since many employees end up leaving during their first year. In addition, complicated federal rules have encouraged companies to limit the eligibility of newcomers.

Recent legislation has changed those rules, however, and waiting periods are starting to shrink. More companies are allowing their workers to sign up for a 401(k) plan when they are hired or at the time they become eligible for health benefits, according to David Wray, president of the Profit-Sharing Council of America, a plan-sponsor trade group based in Chicago. For example, Hewlett-Packard recently began enrolling its new workers automatically, unless they specifically request not to participate in the plan. And last year at NCR, workers were allowed to sign up for the plan and start receiving matching contributions after their first paycheck.

HOW TO LOBBY FOR A BETTER PLAN

Persuading your company to improve its 401(k) plan may not be as hard as you think. Bear in mind that the top executives in your firm probably have more money at stake than you do. And as Ted Benna points out: "A good 401(k) plan has become a powerful recruiting tool in attracting star employees."

Moreover, a better plan doesn't have to cost a lot. Companies with large plans--those with $100 million in assets or more--have the clout to demand more fund choices at little or no additional expense. And even mid-size plans can usually afford to offer funds from several different families, says Hewitt's Schaus.

Clearly, that message is starting to get through. Today more companies are adding brokerage accounts, which allow participants to invest in a broad range of funds and individual securities. For example, of the $15 billion in 401(k) assets that Charles Schwab & Co. administers, about $1.5 billion is in self-directed brokerage accounts. Says Schwab senior vice president Benjamin Brigeman: "Over half of new plans are choosing the brokerage option."

The best way to push for plan improvements is to lobby your benefits department--and get your fellow employees to do the same. Most benefits offices and plan administrators routinely log calls and letters from plan participants to monitor quality of service and identify trouble spots. And many companies survey employee opinion to see whether plan modifications are needed. In 1997, for example, Eastman Kodak hiked the number of investment options in its plans from six to 36, after receiving a flood of calls and letters demanding more choice. "What really drove the need for change home for us was when we brought in five of our fund managers to give a talk," says Eastman Kodak savings plan manager George Dascoulias. "We expected a couple of hundred people, but 1,200 showed up on a snowy night asking about fund performance."

Vocal employees also prompted 401(k) reform last year at Jefferson Smurfit, a St. Louis-based paper manufacturer. "Participants were unhappy, and they let us know by every means they could come up with," says benefits director Cynthia Bowers. "I'd get phone calls, letters and complaints in person." The company increased its investment menu from four funds from one family to 15 chosen from three fund families. Since then, says Bower, "I've received only one complaint--why haven't you done this sooner?" That's a question more 401(k) investors wish they could ask.

Reporter associate: Judy Feldman