Want to Be a 401(k) Millionaire? Start With These Fixes.

(Illustration by Kyle Ellingson)

The stock market gains about 10% a year, but your savings may be falling behind. Here’s how to make the most of your 401(k).

Ron Horning is well on his way to becoming a 401(k) millionaire. A small-business owner from Novelty, Ohio, he has invested steadily for decades, and with the S&P 500 index up 131% over the past six years, including dividends, his savings are now just shy of $1 million.

“When you see those charts, it has exponentially grown over time. That’s where the consistency has been,” says Horning, 63, who plans to retire at 70 with plenty of breathing room across the $1 million threshold.

Horning got lucky, investing through a long bull market. But he also harnessed the magic of compounding—the only way most Americans will ever afford to retire—and he let the market do the heavy lifting.

Yet many people may be looking at their 401(k) and wondering where they went wrong. The average balance for Gen X workers, who range from 45 to 60 years old, is $192,300, according to Fidelity. For baby boomers, many on the cusp of retirement, it’s $249,300.

Those figures belie the fact that reaching $1 million should be doable if you start saving early and stick with it. A 25-year-old with a $60,000 salary could become a 401(k) millionaire at age 55 if they save 15% a year, assuming modest salary increases and a 7% average annual return. Even if they started at age 35, they would be a millionaire by 63, according to illustrations by Fidelity.

The problems arise in part because of problems in 401(k)s and similar plans, like 403(b)s. Most workers are at the mercy of their employer when it comes to investment options, and too many plans are burdened with excessive fees and poor fund choices.

Another potential pitfall: target-date funds. The funds serve a noble purpose—they hold a mix of stocks and bonds that becomes more conservative until a hypothetical “target date” of retirement. They’re the default investment in most 401(k)s, ensuring that workers stay invested in markets along an appropriate “glide path” until they retire.

Yet target-date funds vary widely in their performance and asset mix. And if you don’t use them wisely, they may leave your 401(k) or 403(b) far below what you might have expected.

Do-it-yourself investors may not have it any better. They may be too aggressive or conservative and miss big gains in the market by getting out at the wrong times. Many 401(k)s also include actively managed funds with dubious track records of beating their benchmarks, and most workers are on their own in trying to cherry-pick a winner.

These aren’t trivial problems. More than 65 million workers participate in 401(k) or similar plans. And the category is now one of the country’s biggest retirement savings pools, holding $12 trillion in aggregate—making them a core part of the country’s savings for old age.

“The retirement-plan system really is on shaky ground,” says Steven Abernathy, founder of Abernathy Daley 401k Consultants. “It’s a $12 trillion problem, and it affects about 60% of the [working] U.S. population.”

Whether you’re early in your work life, middle age, or nearing retirement, there are ways to improve your 401(k) performance and reach $1 million. Here are some moves that can help.

First, Focus on Fees

Reams of studies show that paying high fees is costly for long-term savings. A worker contributing $10,000 a year to a 401(k) with 1% in annual fees sees over $222,000 in lost growth over 35 years, according to a report by J. Price McNamara, a benefits attorney.

Yet many savers don’t know they’re paying any fees, according to a Government Accountability Office report. And you may be paying two layers: your plan’s administrative costs and underlying fund fees.

The Department of Labor requires plans to disclose what they charge in fees, and you can typically find it in an annual disclosure called the Form 5500. It’s sometimes hard to suss out the administrative portion of the fee, and there isn’t much you can do about it unless you leave your company.

You have more control over the fund fees you pay. Often, a plan will have a menu of actively managed funds and index funds. Active funds aim to beat market indexes like the S&P 500. Index funds, as their name implies, aim to track the market or a sliver like the Dow Jones Industrial Average.

Most investors are probably paying too much in fees, partly because they use active funds that don’t deliver bang for the buck. Decades of research show that far less than 50% of active stock funds consistently beat the S&P 500. Even fewer funds survive for decades and beat market returns. And don’t chase a hot manager—studies show that hot streaks rarely last.

Odds are that you’re better off with index funds. The asset-weighted cost for index mutual funds in 401(k) plans was 0.06% in 2021, compared with 0.36% for domestic equity funds (including both index and actively managed ones), according to BrightScope.

Firms may charge ex-employees more than current ones for management services. If you leave your company, consider rolling your balance over into an individual retirement account rather than leaving the money in your old plan.

Target-Date Funds: The Good, Bad, and Ugly

America is now a target-date nation: Nearly 60% of retirement plan participants were invested in a single target-date fund in 2024, up 50% from 2014, according to Vanguard’s “How America Saves 2025” report.

The funds solve a lot of problems. Running on autopilot, they largely eliminate the asset allocation problems of the past: a worker having a 100% stock portfolio at retirement, for instance, which would be far too aggressive; or someone spending decades in cash since they didn’t know they had to choose a fund, forfeiting any growth in their 401(k).

Target-date funds also rebalance automatically, keeping your asset mix aligned with your retirement goals as markets rise and fall.

Yet if you’ve been in a target-date fund for years, you might have fallen far behind the stock market’s gains.

Consider the crop of 2025 target-date funds, intended for people who plan to retire this year and which Morningstar began tracking in 2003. (Target-date funds are typically offered in five-year increments, so workers choose the one closest to their planned retirement year.) Since then, $10,000 invested in a 2025 target-date fund would now be worth an average $35,700, according to Morningstar. Had you plowed $10,000 into the S&P 500, you would now have $92,700. The U.S. bond market picked up the rear, at $19,700.

Stocks have had an incredible run for decades, while bonds have fallen on hard times in recent years as the Federal Reserve hiked interest rates, punishing bond prices.

The next 20 years may not be so great for stocks or bad for bonds, and some experts say investors should brace for changes. “I’ve been in the business long enough to know that the S&P 500 isn’t always the winning horse,” says Richard Weiss, chief investment officer of multi-asset strategies, at American Century Investments.

Most target-date funds have around 90% in stocks for young workers, anticipating 30 to 40 years until retirement. That makes sense, since the S&P 500 has returned an average 9.9% annually, including dividends, since 1928, compared with 4.5% for 10-year Treasury notes. Younger workers have decades to recoup losses in the market. Some advisors say even 90% is too conservative if, say, you’re in your 20s and can afford to wait 45 years until you retire.

Things get trickier for workers in their 50s or older. According to Morningstar, equity allocations in target-date funds last year ranged from 26% to 68% at the projected retirement year. Many advisors say retirees need a higher stock allocation than 20%. Even 30% is on the lower end of recommended ranges.

The key is to see how the fund fits your situation—you might want fewer bonds and more stocks if you don’t need such a conservative portfolio when the fund assumes (perhaps incorrectly) that you will be retiring.

One fix would be to go “off date” and switch to a fund that doesn’t correspond to your retirement year. For example, if you plan to retire in 2030 but think your fund holds too many bonds, you could move your assets to a 2040 or 2050 fund for a higher stock allocation.

Some workers split their money between a target-date fund and a stand-alone fund or two, but this typically isn’t the best approach. A target-date fund is designed to be a one-stop shop, and it includes a mix of diversified assets that assumes it’s the only investment you have.

Do It Yourself

Another option: Invest a la carte in funds. In 2021, the average large 401(k) plan offered 28 investment options, of which about 13 were equity funds, three were bond funds, and nine were target-date funds, according to BrightScope.

Index funds are a good place to start. Within that group, there’s lots of variety: Many stock funds tilt toward subcategories like value, growth, small-caps, or dividends. It’s a similar story in bonds, where you can veer far from the broad market, holding assets like high-yield, or “junk” bonds, international debt, and preferred securities.

Almost every flavor of fund eventually falls out favor. Advisors say it’s best to maintain a core of low-cost, broad-market index funds and use variations like satellites. If you’d rather take a hands-off approach, you could skip the variations.

DIY investors should make sure they’re diversified by holding high-quality international stocks. Advisors generally recommend at least 25% of your equity allocation should be held in non-U.S. assets.

Private-equity firms are starting to make inroads into the 401(k) market, but it’s debatable this will boost savers’ returns, especially since these investments are sure to be pricier than stock and bond funds. “Private equity is three times as expensive as the smallest of small-caps,” Abernathy says.

Put It All Together

Consider your 401(k) in relation to your other assets and investments. Workers will sometimes split their money equally among all funds available in their 401(k), but that isn’t true diversification. Instead, you want a mix of stocks and bonds that complements outside investments. If your target-date fund is bond-heavy, you might opt to invest your IRA entirely in stocks.

If your 401(k) is subpar, either due to high fees or poor fund selection or both, then you could lean more heavily on your IRA. Invest at least enough in your 401(k) to get the company matching contribution, then funnel more of your retirement savings into outside accounts.

What if your plan has poor fund choices? You could also ask your human resources department to make changes. Advisor Linda Rogers coached a client to ask their workplace for a bond index fund. It took a year or two, but the new option arrived. “The more people that do it, the more likely they’ll add the option,” says Rogers, a certified financial planner at Planning Within Reach in San Diego.

Another wrinkle is the Roth 401(k), a type of retirement account increasingly showing up in company-sponsored plans. With a traditional 401(k), you’re pushing off taxes until retirement. Contributions are subtracted from your taxable income now, but you’ll owe income taxes later, when you withdraw the money in retirement. Roth accounts are the reverse: You pay the taxes upfront and enjoy tax-free growth then tax-free withdrawals when you’re no longer working.

In plans managed by Vanguard, 86% offered a Roth option at year-end 2024, up from 74% in 2020.

That number may rise since, starting next year, “catch-up contributions” for high earners will have to be in post-tax Roth accounts; the new rule applies to workers 50 and over making more than $145,000. If you haven’t checked your 401(k) in years, take another look, since you might have a new Roth option.

For most young workers, contributing to a Roth is a no-brainer. You’re likely making less than you will later in your career, and you’ll save money getting taxes out of the way when you’re in a lower tax bracket.

Conventional wisdom holds that older, higher earners benefit more from the immediate tax deduction. But some high earners remain in the same tax bracket after they retire. And across all income levels, planners recommend having a mix of pre- and post-tax money in retirement.

“For most Americans, some version of Roth will make sense,” says Will Kellar, partner and lead advisor at Human Investing in Lake Oswego, Ore.

How you put it all together will depend on your priorities and factors out of your control, like your plan’s fund options. But fixing what you can, picking good funds, and reducing friction to the market’s compounding effects should help you get to $1 million.

“Too many plans are built for administrative ease and not participant success,” Kellar says. “People really get one shot at retirement.”

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com