1) What are some of these top 401(k) mistakes?
- Not contributing at all. 401(k) plans are such an easy, tax beneficial and typically low fee way of investing.
- Not contributing at least enough to meet the employer match. Many 401(k)s have a 3% of compensation employer match or greater, so if you do not defer at least this amount, you are simply choosing to turn away free money.
- Not choosing an investment option. Thankfully, most 401(k) plans now have a Qualified Default Investment Alternative (QDIA) in which you are automatically enrolled if you do not make a choice yourself. It is usually a diversified and balanced blend of stocks and bonds, but it could also be a cash fund. When enrolling or becoming eligible for your 401(k), it is important you choose your investment options at the same time you select your deferral amount.
- Overcomplicating your investment choices and choosing too many funds without fully understanding what you’re investing in.
- Making emotional decisions that have no basis in your actual situation, e.g. investing aggressively in stocks when you are near retirement, moving to all technology stocks or moving to cash out of fear because of volatility in the markets even though you are a long way from retirement.
- Not exploring the Roth option. If you have a long way from retirement, although you are getting the same tax deduction with a Roth deferral, the benefit of this tax deferred growth and ultimately tax free distributions can be extremely valuable. Some people split the difference and consider deferring 50% of their contributions to the traditional 401(k) and 50% to their Roth 401(k).
- Not attending the participant education sessions. Most 401(k)s have participant education meetings at least once a year that discuss how to choose your 401(k) investments, the importance of saving for retirement, budgeting, or other general financial literacy topics. You shouldn’t skip out on valuable education provided for free by an investment professional.
- Checking the values daily. If you are invested in anything other than your plan’s cash/money market fund option, the value of your account will fluctuate and not always to the positive. Once you’ve decided on an investment allocation appropriate for you, avoid the emotional stress and stick to checking your values a few times a year, keeping your long term investment perspective in mind.
- Not updating your investment allocation as you age. As you near retirement, you should be moving toward a more conservative allocation to limit any big declines immediately prior to retirement.
2) If you've already made some of these mistakes, what can you do to best rectify the situation?
- There is typically no time frame restriction on when you can make changes to your deferral amount or investment options. If you have made some of these mistakes and need help figuring out the best way forward, call the Plan’s financial advisor team or help desk.
3) What are some of your top recommendations for individuals to protect their 401(k)s/keep them financially healthy going forward?
- If you are a person who doesn’t want to worry about changing your investment allocation over time, “Target Date” funds are a great option, if they are available. As the name implies, this is a type of investment that has your planned retirement year in the name of the fund or the “target date.” As you approach the specified retirement year, the fund will automatically move toward a more conservative allocation.
- See how your 401(k) aligns with your investments held outside your 401(k). Perhaps you have chosen to have a very risky, concentrated stock brokerage account you manage on your own. It may then be prudent to make your 401(k) a little more conservative to balance that risk. Similarly, on the other side of the coin, if you have chosen to hold a particularly high cash reserve in your banking account, perhaps you should hold a little more in stocks in your 401(k).
- See if you can check your retirement success rate on your 401(k) website. Most 401(k) participant websites now look at your current income, age, balance in your 401(k), and deferral amount to project a “retirement success rate.” If your 401(k) is your only means of saving for retirement, this may be an easy way to see how much you need to defer to catch up on a late start.
- If applicable, make sure you are thinking about you AND your spouse’s retirement. The rule of thumb most often heard is saving “at least 15%” toward your 401(k).” If you are the sole wage earner in your household or have a spouse who doesn’t have an employer retirement plan, it is prudent that you defer more than 15% or max out your contribution up to the IRS limit for the year.
Sathya Chey is a registered representative with, and securities and advisory services are offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.
The principal value of a target fund is not guaranteed at any time, including at the target date. The target date is the approximate date when investors plan to start withdrawing their money.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.