Friday, 18 May 2018 15:00

All the ways you can mess up your 401(k) — even if you max out your contributions

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Workplace retirement plans get a lot of bad press, primarily if they are loaded with high fees.

But truth be told, 401(k) retirement plans have been a boon to millions of Americans with access to them. In total, 55 million savers held $5.3 trillion in these plans at the end of 2017, according to industry data[1].

Put simply, 401(k)s work. In addition to providing an income-tax break, the plans are designed to fend off our worst impulses. For instance, you pay a penalty plus taxes due for withdrawing money too early. So people tend to leave money alone to grow and compound — and that’s huge[2].

That’s the good news. The bad news is that otherwise-diligent savers can still leave money on the table with a 401(k), often without realizing it. That’s true even for those contributing the maximum amounts.

Read: A simple change to your 401(k) statement could encourage you to save more for retirement[3]

If you care about maximizing your retirement, be careful about how you treat your plan and avoid making these unforced 401(k) errors.

Mistake No. 1: Not saving in a 401(k)

It seems fundamental, but a shocking number of people simply ignore the opportunity to save for retirement in a workplace plan — up to 60% of eligible workers, according to one study. To overcome human inertia, companies have started to enroll employees automatically.

Of course, many people don’t have access to a workplace savings plan. A Pew Charitable Trusts study found that 35% of workers aged 22 or older had no access to a 401(k)[4]. While 80% of baby boomers join a plan if offered one, just 52% of millennials participate.

But even those who do have access to a 40l(k) plan at work and do save that way can leave money on the table.

Read: How to save twice your salary (or more) by age 35[5]

Mistake No. 2: Not investing

Even with automatic enrollment in place, between 80% and 90% of participants fail to pick any investment at all, leaving those contributions in cash. Yet cash is subject to inflation and thus steadily loses value. Stocks and bonds promise growth above inflation, protecting the purchasing power of your savings.

Companies are responding by creating default portfolios, nudging us to opt out of that choice rather than to opt into it. Typically, this means a target-date fund, a type of all-in-one portfolio based on your age and retirement goals. That’s better than cash for sure, but target-date products can be too conservative[6], especially since we all are living longer in retirement.

Read: Should retirees hold onto equities? Not necessarily[7]

Mistake No 3: Not getting the free money

Many companies incentivize saving by offering to match 401(k)...

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