An advantage of the 401(k) program, is that it encourages people to save.
There is a lot of good in 401(k) plans. However, the bad news is that even if you pay close attention to your plan and contribute to the maximum, you can still become the victim of mistakes, according to MarketWatch, in “All the ways you can mess up your 401(k)—even if you max out your contributions.”
Among the errors you can make are:
Not Investing. Even with automatic enrollment in place, would you believe as many as 80-90% of those participating in a 401(k) leave their contributions in cash? True. The problem? Cash is subject to inflation and steadily loses value. Stocks and bonds may go up and down. However, they traditionally will grow more than inflation.
Turning down free money. Many companies incentivize savings, by offering to match contributions by a percentage of their employee’s salary match or a specific amount. Not making the most of that match is saying “No, thanks” to free money.
Missing company matches by front-loading contributions. This is more commonly seen in aggressive savers, who try to max out their contributions as quickly as possible every year. However, zero contributions in later pay periods risks not getting all the possible contributions. Ask your employer how you might spread out payments over the course of the year. Talk with your HR department to be clear about your company’s match plan details.
Paying high fees. Most companies watch the fees, before signing up with a 401(k) provider. However, you can advocate for yourself, if your company’s choice seems to have high fees. Choose low-cost index funds over expensive active mutual funds. According to BrightScope, almost all plans have access to index funds, but only about a third of total plan assets are invested in low-cost funds.
Timing the market. Here’s what typically happens: people ignore their accounts for years at a time and then one day they open their statement to find there’s a LOT of money in their accounts! It’s more a result of the power of time, known as compounding in investment circles, than of their investing skills. The problem is, the method that worked—a risk-adjusted portfolio over time—makes them think it’s time to micromanage their accounts. Stick with what’s worked and let the power of compounding do its job. You will find that you will do better.
Abandoning accounts. Leaving one job and opening up a new 401(k), results in many people forgetting to move their old 401(k). Fees can take their toll over time and a once robust account can be depleted.
When you have too many accounts, it can be difficult to manage them wisely. You end up with many accounts with funds in the wrong kinds of investments. What was appropriate in your thirties, is wrong for your early 60's. Roll those old balances into a single IRA and you’ll be able to have a clearer vision of how your portfolio is balanced or how it isn’t.
It is a good financial idea to be a good saver with maximum contributions, but it is also a good idea to beware of the potential errors.