Your 401(k) is one of the most reliable ways to save for retirement, providing tax advantages and long-term growth potential. However, even a well-designed plan can fail if you make common mistakes.
These mistakes can silently destroy your retirement fund, whether it’s fees, poor diversification, or missed contributions. The good news is that these pitfalls can be avoided with a little knowledge and effective planning.
By understanding these mistakes and how to fix them, you can ensure that your 401(k) is working hard to protect your financial future.
1. Looking for High Fees
Many people overlook the fees associated with a 401(k), including administration fees, investment management fees, and maintenance costs. Even a 1% annual fee can ruin your savings in the long run.
For example, a $100,000 account with 1% annual fees loses $1,000 a year—money that could have compounded into much more. Reviewing your plan’s financial disclosures is important.
If fees are high, consider moving to a lower-cost option such as index funds or ETFs, which often have expense ratios of less than 0.1%. You can also advocate for better options in employer-provided programs or seek expert advice.
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2. Non-diversification of Investments
Many 401(k) participants focus too much on one stock, usually that of their employer, putting their portfolio at greater risk. Diversification across stocks, bonds, and other assets reduces risk and improves growth potential.
Young investors may focus on stocks for growth, while those nearing retirement often turn to bonds for stability. Regular rebalancing—once or twice a year—aligns your portfolio with your goals.
Consider target date funds, which automatically adjust allocations as retirement approaches.
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3. Ignoring Your Contribution Limits
Contributing too little—or not contributing at all—is a common 401(k) mistake. In 2024, the IRS limits are $23,000 for those under 50 and $30,500 for those over 50.
Failing to increase employer matching is like leaving free money behind. For example, if your employer matches 50% to 6% of your salary, contributing less means losing part of your compensation.
Be aware of donations to avoid exceeding limits and incurring penalties. If money is tight, start small and increase donations gradually—automatic changes make it easier to stay consistent.
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4. Neglecting to Update Beneficiary Information
Although it doesn’t directly affect your balance, failing to update your beneficiary information can negatively affect your 401(k) after you pass. Life changes such as marriage, divorce, or the birth of a child should prompt a quick review to make sure your savings are going to the right people.
Without updated beneficiaries, your account may end up being logged or distributed according to the old instructions. Review this information regularly to avoid unnecessary problems for your loved ones.
5. Forgetting About Old 401(k)s
It’s easy to lose track of 401(k) accounts from previous jobs, but letting them sit unmanaged can limit their growth. Consolidating old accounts into your current 401(k) or rolling them into an IRA can simplify management, reduce costs, and provide more investment options.
Take inventory of all your retirement accounts to ensure they are serving your goals and are properly diversified.
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Protect Your Retirement Future
Think of your 401(k) as a flexible tool that changes with your goals and circumstances. Regularly reviewing your strategy ensures that you are not only saving, but purposefully growing your wealth.
Take control of your retirement planning today. By avoiding common mistakes, you can build a strong and rewarding financial future—one step at a time.
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