Don't Make These 6 Big 401(k) Blunders
The 401(k) may be the premier retirement plan available to employees nationwide today, replacing the pension as the first and foremost lifeline to happy golden years. But just because it's a popular retirement tool doesn't mean it's devoid of pitfalls.
In fact, many would-be retirees find themselves muddling through the whys and wherefores of the 401(k) system -- and they're shooting themselves in the foot along the way. Are you making any of these common blunders?
1. Failing to enroll in the first place. Over the long run, one of the biggest hurdles to 401(k) participation is the initial signup phase. Statistics over several years found that only around 60% to 65% of eligible employees chose to participate in the average 401(k) plan unless the employer automatically enrolled everyone. That's a majority, sure ... but more than a third of workers have missed out entirely! That third tends to skew younger, which is predictable -- people start worrying more about retirement as it gets closer. But it's also unfortunate, because the earlier you start, the bigger your pile at the end.
2. Cashing out when changing jobs. This one's common among twentysomethings, but it's a mistake at any age. Young folks often start contributing to a 401(k) with the best of intentions. Then they change jobs, get that distribution check -- and blow it on a European vacation or a new car instead of rolling it over. But here's the thing: Even if your balance seems insignificant -- $5,000, say -- the future value is enormous. $5,000 taken out today and used as a down payment on a car gives you several years of transportation. $5,000 left in an index fund that returns an average of 10% annually over the next 40 years turns into $226,296 . That might be very handy to have when you retire.
3. Missing the match. Most employers match your contributions up to some level. If you're not contributing enough to collect the full amount of the match, you're foregoing a monthly bonus that your employer is offering to pay to your retired self. It's free money -- get it all!
4. Making the wrong investments. Throwing everything in that aggressive growth fund back in 2004 doesn't look like a great move now, does it? Likewise, sticking with the money market fund when the market turns around -- and I believe it will -- will look just as silly, and might be even more expensive in the long run. Most 401(k) plan providers offer online tools to help you come up with a good asset-allocation strategy that will maximize your growth with minimum fuss. Find yours, use it, and follow its recommendations.
5. Taking loans. Spending a few days in a 401(k) call center several years ago opened my eyes to the ubiquity and dangers of 401(k) loans. These loans have a place, but many plan participants have 10% or more of their balances tied up in loans -- and out of the market -- often for years . That's an expensive mistake, even if the market takes a dive every now and then. With a simple S&P 500 index fund, you would have missed out on gains of more than $900 over the past five years for every $1,000 you borrowed in a 401(k) loan.
6. Loading up on company stock. Many plans offer employees the option to invest in the employer's stock, but beware. Jason Zweig, writing in The Wall Street Journal , reports that "12 out of every 100 people whose 401(k)s can hold company stock have at least 60% of their retirement money riding on it."
If your employer is in a big growth phase, or pays a fat dividend, that might sound great -- but it's not . To see why, take a step back and visualize your entire financial picture. You might have savings in the bank, equity in your home, investments in taxable accounts, and your retirement accounts ... and your job. You're already very exposed to the risks of your employer's performance just by working there. If your employer takes a nosedive and you get laid off, at least you'll have your other assets to fall back on -- unless they've taken the same nosedive.
Resolve to fix those blunders
I'd be remiss if I left off one more blunder, one that lots of well-meaning folks make: Failing to stay on top of things. It's certainly understandable -- after all, the 401(k) is designed to help you save with as little involvement as possible. But to get the most out of it, you do need to give it your full attention now and then.
Fortunately, all of these are fixable problems. All you need to do is contact your plan administrator or your company benefits point person, or do a little due diligence to seize control of your retirement future.
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This article was originally written by John Rosevear and published on Dec. 17, 2008. It has been updated by Dan Caplinger, who doesn't own any of the stocks mentioned in this article.
The article Don't Make These 6 Big 401(k) Blunders originally appeared on Fool.com.
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