Most people think of their 401(k) as a simple system: you contribute money, choose investments, and let time do the work.
But there’s a part of the process that often gets overlooked.
Because while you choose your investments…you don’t choose the menu you’re choosing from.
In a 401(k), your options are pre-selected, typically by your employer, working with a plan provider and advisor. And while those menus are designed to be helpful, the quality and cost of the options can vary more than most people realize.
Some plans offer low-cost, efficient funds.
Others include options that are more expensive or simply less effective over time.
And that difference matters.
Not All Investment Options Are Created Equal
Research over the past decade has taken a closer look at how 401(k) menus are actually constructed.
One study from the Yale Law Journal found that many plans include what are known as “dominated funds,” investment options that are more expensive and don’t perform any better than alternatives available in the same plan.
So why do they exist?
Because 401(k) menus aren’t built solely for performance. They’re shaped by employers and plan providers, and in some cases, higher-cost funds help subsidize the cost of running the plan itself.
In other words, the menu you’re given isn’t always a perfectly optimized list. It reflects a set of incentives behind the scenes.
Small Costs, Big Consequences
The same research found that excess fees in 401(k) plans—relative to low-cost index funds—average around 0.78% annually.
That might not sound like much.
But over time, small differences don’t stay small.
A 1% annual drag—whether from fees or underperformance—can result in 25–30% less in retirement savings over a working career.
Same contributions.
Same market returns.
Different outcome, driven entirely by costs and fund selection.
So What Should You Do?
This isn’t an argument against 401(k)s.
They’re still one of the most powerful retirement tools available, especially with employer matching and tax advantages.
But they’re not all the same.
And the structure of your plan—the specific options available to you—can have a meaningful impact on your long-term results.
The real takeaway:
Don’t just focus on how much you’re contributing.
Pay attention to what you’re actually invested in.
A Simple Next Step
If you haven’t reviewed your 401(k) options recently, it’s worth taking a closer look:
- Are there lower-cost versions of the funds you’re using?
- Are you relying on actively managed funds when index options are available?
- How do your plan’s fees compare to typical benchmarks?
Those small adjustments can compound into meaningful differences over time.
And if you want a second set of eyes on it, that’s exactly the kind of thing we help clients evaluate every day.