Common 401 (k) plan Mistakes to be Avoided
Not participating in your 401 (k) plan
The biggest mistake you can make regarding your 401(k) plan is not participating in your employer’s plan. It is because you know you’ve already lined up, perhaps through a pension, then that’s fine. But if you’re just putting it off, you’re putting your future financial security at risk. Consider that it’s typically easy to participate and a 401(k) plan can help you with some tax breaks thrown in as well.
Not contributing enough to your 401(k) Plan
Another blunder often becomes clear is not contributing as much to your account. When the folks at Schwab recently surveyed 1,000 401(k) participants, they hadn’t spent less to have saved more. Below are the top spending regrets:
- 55 percent regretted not spending less on meals out
- 31percent regretted not spending less on expensive clothes
- 28 percent regretted not spending less on new cars
- 28 percent regretted not spending less on vacations
- 26 percent regretted not spending less on the newest tech gadgets
Not taking full advantage of an employer
Another mistake you might make to your 401(k), is not taking full advantage of an employer match. Most 401(k) plans come with a match; the employer contributes 50 percent of your contributions of up to 6 percent of your salary. So if you earn $70,000 and contribute 6 percent ($4,200), your employer will add another $2,100. That’s a guaranteed 50 percent return, which you’d be hard-pressed to find anywhere else.
Loading up on too much company stock
Another blunder is stuffing your 401(k) with too much of your employer’s stock, and that gives you an edge as an investor. But there’s a risk if you have most of your retirement money invested in your employer. If the company runs into trouble, plenty of workers have been blindsided when their employers’ fortunes changed. Think of Enron where employee retirement savings completely imploded. In April, last year The Wall Street Journal profiled a GE retiree who had some $280,000 in company stock, watched his shares plummet to $110,000.
Staying with your 401(k) plan’s default investment choices
It’s also a big mistake to be too conservative in the way you invest huge sums into your 401(k) annually. A common way that people unknowingly invest their money is to just leave funds in their plan’s default investments. For most folks, the stock market is the best choice for all of their money. Yes, it can be volatile, it has always gone up. Like a lot of Americans you have plenty of investing and saving to make your retirement comfortable.
Picking the wrong mutual funds and investments
It’s easy to see why you should invest in individual stocks in your 401(k), for picking the wrong mutual funds and investments. And this presents another opportunity to avoid mistakes by choosing funds that perform well. You can research mutual funds, where you can look upholdings, performance, and more. An actively managed fund will have financial pros, the managers will be deciding when to buy and sell various investments.
Ignoring fees in your 401(k) Plan
While some actively managed funds do well, about 92 percent of US large-cap stock mutual funds lagged the returns of the S&P 500 in June 2018. The pattern holds when you look at how much of a difference a single percentage point can make. That seemingly small single percentage point can cost you potentially even hundreds of thousands of dollars. Imagine two identical mutual funds would grow, one with an expense ratio of 1.1 percent and one of which charges only 0.1 percent.
Not considering the Roth
More employers are now offering Roth 401(k), and it’s a mistake not to investigate this option if you’re still decades from retirement. With a traditional 401(k), you withdraw the money in retirement; it’s taxed as ordinary income to you. With the Roth 401(k), you contribute post-tax money and thus, you get to take all the money out of the account tax-free. Imagine, socking away $10,000 annually for 25 years, growing at 8 percent, you’d end up with close to $790,000, in retirement, free of tax.
Ignoring important rules
Another blunder is not being aware that you can’t withdraw money from your 401(k) until age 591/2. Take money out before, and you’ll face a 10 percent withdrawal penalty, but if you leave your job when you turn 55 or later, you can withdraw funds from that employer’s 401(k) without penalty. Retiring early due to a qualifying disability can also free you from the penalty, such as financial hardship.
Cashing out or borrowing
Cashing out your 401(k) account is another mistake because it stops the distributed money from growing for you. When you leave your employer, you have the option of leaving your money in the account, transfer the money to your new employer’s 401(k) plan, or cash out. Borrowing from your 401(k) is also usually a mistake, you pay the funds back after a year or three, but you’ll have missed out on the growth it could have achieved.