Your 401(k) is one of the most reliable ways to save for retirement, offering tax advantages and the potential for long-term growth. However, even a well-designed plan can fall short if you make common mistakes.
These errors can quietly erode your retirement fund, whether it’s high fees, poor diversification, or missed contributions. The good news is that these pitfalls can be avoided with a little knowledge and proactive planning.
By understanding these mistakes and how to correct them, you can ensure your 401(k) works hard to secure your financial future.
1. Overlooking High Fees
Many people overlook the fees associated with their 401(k), including administrative costs, investment management fees, and maintenance charges. Even a 1% annual fee can erode your savings over time.
For instance, a $100,000 account with a 1% annual fee loses $1,000 yearly—money that could have compounded into much more. Reviewing your plan’s fee disclosures is essential.
If fees are high, consider reallocating to lower-cost options like index funds or ETFs, which often have expense ratios under 0.1%. You can also advocate for better options in employer-provided plans or seek professional advice.
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2. Not Diversifying Investments
Many 401(k) participants concentrate too much on a single stock, often their employer’s, exposing their portfolio to significant risk. Diversification across stocks, bonds, and other assets reduces risk and enhances growth potential.
Younger investors may focus on stocks for growth, while those nearing retirement often shift toward 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 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 maximize employer matching is like leaving free money behind. For example, if your employer matches 50% up to 6% of your salary, contributing less means forfeiting part of your compensation.
Monitor contributions to avoid exceeding limits and incurring penalties. If money is tight, start small and increase contributions gradually—automating them makes it easier to stay consistent.
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4. Neglecting to Update Beneficiary Information
Although it does not directly impact your balance, failing to update your beneficiary information can seriously affect your 401(k) after your passing. Life changes such as marriage, divorce, or the birth of a child should prompt an immediate update to ensure your savings go to the right people.
Without updated beneficiaries, your account could end up in probate or be distributed according to outdated instructions. Regularly review this information to avoid unnecessary complications 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 fees, and offer more investment options.
Take inventory of all your retirement accounts to ensure they work efficiently toward your goals and are appropriately diversified.
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Secure Your Retirement Future
Think of your 401(k) as a dynamic tool that evolves with your goals and circumstances. Regularly reviewing your strategy ensures that you’re not just saving, but growing your wealth with purpose.
Take charge of your retirement planning today. By avoiding common mistakes, you can build a resilient and rewarding financial future—one step at a time.
