Eight Common 401(k) Mistakes

BY: Daniel M. Savage


An employer-sponsored retirement plan is among the most valuable fringe benefits – if not the most valuable – afforded to millions of working Americans. For most, it will serve as their primary source of income during their non-working years. But many make some fundamental errors in assuming that, once they've set their contribution percentage, there's nothing else to consider. Here are eight pitfalls to avoid. 

  1. Not understanding your tolerance for risk. Figuring out how much risk one is willing to accept should be among every investor's first steps. Doing so will help you to make smart choices decisions and stay the course, when appropriate.

  2. Not prioritizing the importance of asset allocation. Asset allocation concerns the mix of areas in which you invest your dollars (namely, stocks, bonds, and cash). It significantly impacts both your portfolio's volatility and potential for long-term returns, and as such, should be tailored specifically to your age and financial situation, informed greatly by your tolerance for risk.

  3. Making too many changes. Some folks excessively change change their asset allocations and/or individual investment choices, obsessing over market fluctuations and/or reacting to “tips” from friends. Doing so may increase overall expenses and adversely impact investment performance. For long-term investors, “steady as she goes” is often the best way to go.

  4. Failing to account for other assets. Many individuals – and their spouses – have investments beyond their 401(k) account, many of which are sizable. Considering household assets in the aggregate (rather than retirement assets in isolation) will produce better overall investment decisions.

  5. Maxing out contributions to a sub-optimal plan. Here is an important truth: some workplace-sponsored 401(k) plans are simply bad, in terms of expenses and/or investment option availability. If your plan is sub-par, you may be better served by diverting some contributions to an IRA that offers lower-cost and/or higher-quality investment choices. That said, it's important to not overlook any employer-matching contribution, and to confer with your Wealth Manager and tax preparer before making such a decision.

  6. Ignoring outstanding/unique financial circumstances. Everyone's situation is different – some more so than others. For example, a person may be covered by a classic pension plan that pays a significant amount of his or her living expenses during retirement. This may allow one to invest more aggressively than otherwise.

  7. Steering clear of lesser-known funds. Plans usually feature funds from established, well-known companies like Vanguard, Fidelity, and T. Rowe Price. They also may include less-familiar names. Rather than rejecting the latter due to perceived lack of name recognition, it may behoove you to research them because of the possibility of lower fees and/or excellent quality. Morningstar reports, as well as your Wealth Manager, are good sources of information on fund viability.

  8. Deferring too little of one's pay. Though a highly subjective notion, numerous studies show that participants often invest well below their capacity, even when a company matches contributions. Over the course of years, this may result in a participant missing out on hundreds of thousands of dollars of potential savings. Regularly analyze your household budget and consider a formal retirement planning exercise to maximize your efficiency and chance for success.

If we're being honest, there are far more than eight mistakes that one can make relating to their 401(k) – including dipping into one’s account early, withdrawing money when changing jobs, letting contribution limits stagnate, and ignoring the Roth option – but nipping the above items in the bud will position you well for success from the jump. Please reach out to me or another member of the Wealth Management team to learn more.

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