The Mistakes You’re Making With Your 401K

The Mistakes You’re Making With Your 401K

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Sarah Landrum
Nov 2, 2016

Just having a 401K is a good start. But it's what you do with it that has a major impact on your retirement. You're the one in charge of it all, but saving for the future doesn't have to be another dread on your financial checklist. With a little solid advice, you'll be well on your way to conquering common 401K mistakes and closer to your retirement dream.

Many mistakes people make managing their retirement accounts are painfully obvious, while there are others you wouldn't ever think to consider. Like most investment mistakes, the things you're doing wrong with your 401K can be boiled down to waiting too long, making excuses, letting accounts slip by the wayside, or taking the wrong strategy (or worse, no strategy at all). Why risk living off of Ramen noodles your entire life?

1. Not Matching Your Employer's Contribution

Most employers offer to match a percentage of the amount you contribute to your company-sponsored retirement plan. The most common match is 100%, or dollar for dollar, on the first 6% of employee contributions. Some companies will match over 100% or provide additional contributions. But even if your employer offers a lower percentage, it's wise to match. Why not let your employer pay you for making a good financial investment in your future? Don't pass up free money in your pocket.

Always ask about employer match when starting a new job so you can enroll and start saving as soon as possible. Not new? Don't be afraid to ask. The sooner you know, the more you can save.

2. Waiting to Save Later in Life

You're young and have goals: traveling, settling down with kids, opening a business – whatever it may be. You've got time before you need to start thinking about retirement, right? You'll contribute when you make more money. That may be the plan, but you never know what the future brings. You don't want to retire and realize you didn't save enough money. Opening an account and designating an automatic contribution, no matter how small now, will add up in the future. (Do you know about compound interest?)

3. Saving Without an Annual Retirement Need In Mind

You know you need to save, but how much? Saving without a goal for your annual retirement needs may keep you behind schedule and working longer. Try using a calculation tool to assist you with deciding how much to set aside. A calculator will take into account your current age, age of retirement, salary, annual rate of return and other factors to estimate how much you'll need upon retirement, and how much to start saving now.

4. Never Increasing Your Contribution Amount

A 401K is not a set-it-and-forget-it recipe. When you open your account and set a contribution amount, don't neglect to make updates down the road. Experts advise that you should increase the annual contribution rate by at least one percent annually—or even more, if you can swing it. Your paycheck won't feel the pain, but your retirement savings will benefit from a little extra padding.

(Image credit: William Strawser)

5. Not Consolidating Accounts

As you move in your career from employer to employer, racking up multiple 401K and IRA accounts, you'll find it's easier to lose track of your accounts than a $20 bill in your coat pocket. Don't lose your money! When you pack up your desk, remember to take your accounts with you to your new job.

If you've already lost track, make a point to roll over your different accounts and consolidate them into one. It involves signing papers with a fancy industry term—distribution paperwork. This places your accounts into one private IRA or a 401K with your current employer.

6. Obsessing Over Shifting Financial News

When you're counting pennies to make it week-to-week, it can be shocking to see your 401K balance drop by several thousand dollars. My advice: Keep calm and don't obsess over short-term financial market shifts. Make your decisions only based on long-term trends. The market often rebounds on the short term, but that's not a hot headline, is it?

7. Buying Based on Past Performance

Mutual fund companies are all about praising past performance, but the relationship between future and past return isn't so agreeable. The Securities and Exchange Commission does require such companies to tell investors that past performance isn't a reliable predictor of future results. Exercise caution.

8. Not Taking Advice When You Need it

There will come a time when your portfolio needs a professional eye. Take advantage of any in-plan assistance provided by your employer as an employee benefit. Often, consulting with the plan administrator will point you in a direction you may not have considered. There's nothing wrong with having an open mind, especially if it helps you save for your retirement.

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