I'm very disappointed with the 401(k) plan at my new job. I'm tempted to just invest outside it. What do you think?

I think I may have run into David while queuing up for a drink at a wedding reception last week.

Of the many questions I get at receptions, cocktail parties, and other social functions, this has to be one of the most common. (The most common is whether Fund X is a good fund.) Read on to learn the four things I tell my questioners, and you won't even have to buy me a drink to get my suggestions.

Get a 100% Return from a Terrible Plan
Even the worst 401(k) plan is worth participating in if your employer makes matching contributions. Let's say the company matches your contribution up to 5% of your salary. Let's say your salary is $60,000. Put in 5%, or $3,000 and your employer will kick in $3,000, too. That's a 100% return on your investment, even if you make no money from the funds themselves. Your plan would have to have some remarkably sorry funds to earn absolutely nothing, though.

Ask Yourself How Bad Your Plan Really Is
Take a hard look at your plan and ask yourself if it's really that bad. Just because you don't have access to the hottest funds of the past year, your plan isn't necessarily bad.

Compare each fund in your plan with its Morningstar category to see how each stacks up against the competition. Just go to the fund's Morningstar Quicktake Report. You'll find all sorts of vital information about the fund, including its category rating. The rating tells you how the fund's returns and risk for the past three years compare with its peer group.

If your options are just average, don't dismiss them. Even with the market's recent misery, the typical large-cap blend fund earned an annualized 13% for the decade ending May 31, 2001. That's not too shabby.

Go Outside the Plan
Maybe your plan is chock full of subpar funds, though. Or maybe it lacks certain things, such as a good foreign-stock option. In that case, David has the right idea. You should first take advantage of employer matching and invest in the plan's decent funds. Once you've done that, consider filling in the gaps with an Individual Retirement Account.

An IRA is good because you get the advantages of tax-protected compounding. That can make a huge difference in the ultimate size of your nest egg. For example, if you put $10,000 in Vanguard 500 Index in a tax-sheltered account 15 years ago, you would have earned $72,865 before taxes at the end of May 2001. Even though Vanguard 500 has excellent tax efficiency (shareholders kept 90% of their annual pre-tax returns for the period) you would have wound up with nearly $12,000 less if you had held the fund in a taxable account.

On the minus side, you can't put as much in an IRA as you can in a retirement plan. Currently, the upper limit for 401(k) contributions is $10,500 per year. For IRAs, it's $2,000. The recent tax bill raises those limits, but you'll still be able to put a lot more into your 401(k) plan. (Read this to learn the top 10 highlights of the tax bill.)

Share Your Displeasure
Along with following the previous steps, let your employer know that you don't like your retirement plan options. Lobby for change. Contact the company's Human Resources department--they can direct you to the person responsible for the plan.

And don't assume that you're alone in your dissatisfaction. Odds are that you aren't the only disappointed employee, so enlist your colleagues in an effort to effect change. It can work.

This article originally appeared June 13, 2001.