Your Employer Picks the Investments in Your 401(k) — What Happens When Workers Say They’re Bad Choices?

Your employer usually does not decide where every dollar in your 401(k) goes. Instead, the company or its retirement-plan committee generally chooses the investment menu, while workers choose from that menu. That distinction matters because employees can object to the choices, but simply disliking a fund does not mean the employer broke the law.

For private-sector plans covered by ERISA, the people responsible for the plan have fiduciary duties. They must act in participants’ interests, follow a prudent process, consider fees, and monitor investment options after selecting them.

That creates an interesting situation: What happens when a bunch of workers look at their 401(k) lineup and think, “Seriously? That’s what we get?”

The Employer Chooses the Menu, Not Your Personal Retirement Strategy

Most participant-directed 401(k) plans give workers choices within a lineup selected by the plan fiduciaries. Those choices might include stock funds, bond funds, target-date funds, stable value options, and other investments. The employee then decides how to divide their own contributions among the available choices.

So an employee generally cannot demand that the company add a particular fund simply because it looks attractive. A retirement plan has to serve a workforce with different ages, salaries, goals, and appetites for risk. Creating a menu with enough useful choices matters more than giving every employee a personal investment buffet.

There is another wrinkle. If an employee does nothing in an automatic-enrollment plan, the plan may direct contributions into a default investment selected by the fiduciaries. Properly designed qualified default investment alternatives can receive special fiduciary protections, but the plan still must select and monitor the default prudently.

A Terrible Year Does Not Automatically Make a Fund a Bad Choice

This is where frustration can collide with fiduciary law.

Suppose a fund loses money during a rough market year. Workers may reasonably hate seeing red numbers on their statements. But investment performance alone does not establish that the employer acted improperly. Stocks can fall. Bond funds can lose value. Even a sensible long-term investment can have ugly stretches.

The more meaningful questions involve the process behind the menu. Did the fiduciaries evaluate the investment? Did they consider its fees, risks, performance, and available alternatives? Did they continue monitoring it? The Department of Labor specifically says fiduciaries have an ongoing responsibility to monitor investment options and determine whether they remain appropriate.

That distinction prevents every unhappy market day from becoming a legal complaint. A fund that loses 15% during a market downturn is not automatically evidence of misconduct. A plan that keeps an investment option without properly evaluating whether a cheaper or otherwise appropriate alternative exists raises a different question.

Fees Can Make the Complaint Much More Serious

One of the easiest details for workers to overlook sits quietly in the investment information: fees.

A 401(k) fund’s return does not tell the whole story because investment-related expenses reduce the return credited to the account. The Department of Labor notes that investment fees represent a major component of retirement-plan expenses and generally come out of investment returns.

Imagine two investments that serve broadly similar purposes. One costs considerably more than the other. That does not automatically make the expensive option unlawful, because fiduciaries can consider services and other factors. The question becomes whether the costs remain reasonable given what the plan receives.

The Supreme Court addressed this issue in Hughes v. Northwestern University. The Court emphasized that fiduciaries must independently evaluate investments and cannot simply point to the existence of other choices as a defense against allegations involving imprudent investments or excessive fees.

Workers Have a Few Ways to Push the Issue

Employees do not have to start by hiring a lawyer and storming into court with a folder full of account statements. A sensible first move can involve the plan administrator or employer. Workers can request an explanation, review the Summary Plan Description, examine investment and fee disclosures, and ask how the plan selects and monitors its investment options. The Department of Labor specifically encourages participants to start with the plan documents and administrator when they have questions or problems.

Workers can also compare what the plan actually offers. Look at expense ratios, investment objectives, risk characteristics, performance periods, and available benchmarks. A complaint becomes more useful when it identifies a concrete issue rather than simply declaring that the investment lineup stinks.

If the concern involves a possible ERISA violation, workers can contact the Department of Labor’s Employee Benefits Security Administration. EBSA handles participant complaints and may pursue informal resolution or refer appropriate matters for enforcement.

A Lawsuit Is Possible, But “I Hate This Fund” Is Not Enough

ERISA gives participants the right to bring certain legal claims involving fiduciary breaches. The law can provide remedies when fiduciaries fail to meet their obligations, including situations involving losses caused by a breach.

That does not mean every unpopular investment becomes a courtroom case. A participant-directed plan can generally protect fiduciaries from losses resulting from the participant’s own investment decisions when the plan satisfies the applicable requirements. The fiduciary’s responsibility for prudently selecting and monitoring the menu remains separate.

In other words, choosing the wrong fund from a reasonable menu can be your decision. Offering and retaining an imprudent investment can potentially be the plan’s problem. Those two situations can look remarkably similar on a retirement statement, but the legal questions behind them are very different.

The Smartest Complaint Starts with Evidence, Not Outrage

If workers believe their 401(k) options are poor, the strongest approach involves getting specific. Find the plan’s investment disclosures. Check the fees. Review the investment objectives and risk information. Look for comparable alternatives inside the plan and ask how fiduciaries evaluate and monitor the lineup.

That turns “Why are they making us use this thing?” into a much better question: “What process did the plan use to decide this investment remains appropriate?”

Would you be comfortable challenging your employer’s 401(k) investment choices if you believed the fees or options were unreasonable?