Re-posted from Are you Making these 4 Major 401K Mistakes?
If you’re lucky enough to have access to an employer-sponsored 401(k), you should know that you have a great opportunity to accumulate a bundle in time for retirement. That’s because 401(k)s allow you to contribute much more on an annual basis than IRAs. The current yearly limits are $18,500 for workers under 50 and $24,500 for those 50 and over. By comparison, IRAs max out at $5,500 and $6,500 a year, respectively.
Still, having a 401(k) will only get you so far if you don’t manage it wisely. With that in mind, here are a few major mistakes you should make every effort to avoid.
1. Not contributing enough to snag your employer’s match
One benefit of having a 401(k) is the opportunity to build wealth not just with your own money but your employer’s as well. In fact, 92% of companies that offer a 401(k) also match worker contributions to some degree. But to get that money, you’ll need to contribute money of your own. Unfortunately, an estimated 25% of workers don’t put in enough to capitalize fully on their employers’ matching dollars, and are thus leaving a collective $24 billion on the table each year.
If you’re not getting your employer match, you’re kissing free money goodbye — so don’t let that continue. Figure out how much you need to put into your 401(k) to get that match, and cut corners in your budget to make up for a slightly smaller paycheck. Otherwise, you’ll miss out on not just your company match itself, but the potential to invest it and grow it into a larger sum over time.
2. Not increasing your contributions year after year
Many workers get a raise year after year. If you’re one of them, then you’re doing yourself a major disservice by not sticking that extra money into your 401(k) before it shows up in your paychecks.
Think about it: Unless your expenses go up drastically from year to year, you can probably get by without that additional money. So, if you arrange to have it land in your 401(k) from the start, you won’t come to miss it.
3. Sticking with your plan’s default investment
When you first sign up for a 401(k), you’ll be automatically invested in your plan’s default option until you select your own investments. That default option is usually a target date fund, and while that may be a good choice for some workers, it’s not necessarily the best choice for you.
Target date funds are designed to grow increasingly conservative as their associated milestones near. For example, if you invest in a target date fund for retirement over a 30-year period, you’ll generally start out with a more aggressive investment mix and will shift toward safer assets as that period winds down.
The problem with target date funds is that they don’t necessarily provide the best returns on investment, nor is your 401(k)’s default target date fund designed to align with your specific strategy or tolerance for risk. A better bet, therefore, is to review your plan’s investment options and choose those that are more likely to help you meet your goals. Keep in mind that you may, after reviewing your choices, decide to stick with that default fund, and that’s fine. Just don’t make the mistake of not exploring alternatives first.
4. Not paying attention to investment fees
Of the various investments you’ll get to choose from in your 401(k), some are bound to be more expensive than others. But if you don’t pay attention to fees, you could end up losing thousands upon thousands of dollars in your lifetime without being any the wiser. The funds in your 401(k) are required to disclose their associated fees, so take a look at those numbers and aim to keep them as low as possible without compromising on returns. You can generally pull this off by sticking mostly to index funds, which are passively managed and don’t have the same costs as actively managed mutual funds.
Participating in a 401(k) plan is a great way to set yourself up for a comfortable retirement. Avoiding these mistakes will help you make the most of that plan, leaving you with a higher ending balance by the time your golden years eventually roll around.
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