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.
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.
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
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). 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
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, especially since we all are living longer in retirement.
Read: Should retirees hold onto equities? Not necessarily
Mistake No 3: Not getting the free money
Many companies incentivize saving by offering to match 401(k) contributions up to a specific amount each year. Saving less than the match is turning away free money. For that reason, default accounts often start out saving at the matching level. A typical match is 50 cents for each dollar you save up to 6% of your pay. So if you make $50,000 a year, the first $3,000 you put in a 401(k) would be matched with $1,500 from your employer.
Some employers do less, matching only up to 3% of your salary. While there can be a lot of corporate reasons for the difference, it’s worth asking why. While you should strive to save up to the IRS maximum — $18,500 in 2018 and $24,500 if you are 50 or older — getting your company’s full match is the minimum you should do.
Mistake No. 4: Missing out on company matches by front-loading contributions
This mistake may afflict aggressive savers who feel they should max out their 401(k) as quickly as possible each year. But having zero contributions in later pay periods risks not get all the matches you are due because some employers spread out their payments over the entire year. And if there is no contribution by you in one pay period, there is no match either.
Some employers will “true up” contributions to make sure you get the full amount, or make annualized matches to even out the year, but policies vary from company to company. A Deloitte study found that nearly nine in 10 companies match per pay period — and just 45% conduct a true-up.
Talk to your human-resources department before you front-load your 401(k).
Mistake No. 5: Paying high fees
A lot of small companies choose whichever 401(k) provider makes a pitch that best responds to their own needs, such as reduced paperwork if the firm can’t manage the plans in house. Yet these “easy” solutions can be loaded with higher-than-average fees — paid by employees.
That doesn’t mean you can’t advocate for yourself! Once you’re in a plan, choose low-cost index funds over costly active mutual funds. A BrightScope study finds that 98% of 401(k) plan participants have access to index funds in their plan, but just 31% of total plan assets are in low-cost funds vs. more costly mutual funds.
While digging into the fees in your plan can be fairly complicated and can vary according to your investment choices, it’s worth doing. Your human-resources department should be able to provide a human-readable breakdown. You also can compare your plan against others by simply searching for it at Brightscope.com.
Mistake No. 6: Trying to time the market
People tend to ignore their 401(k) balance for a long time. Then one day they open a statement and find out that they are 401(k) millionaires. Thanks to the power of time — known in investing as compounding — it happens.
In effect, your money starts to make money on its own, pushing up your account balance dramatically in the later years regardless of your continued contributions. Money prudently invested doubles, then doubles again, and then again, like folding a single sheet of paper until it’s too fat to fold even once more. (You can’t get past seven folds without serious help.)
The problem is that the method that got them rich — a risk-adjusted portfolio — falls by the wayside as the employee tries to trade his or her way to even greater riches.
Soon, a diversified portfolio becomes concentrated, the market changes course, and the once-fat 401(k) starts to look like a 201(k). Stick with what got you there, and compounding will take care of the rest. Prudently invested, $1 in 10 years should turn into $2, but then 10 years later it’s $4, then $8, and then $16 — even though you haven’t saved another cent.
Read: More than 40% of Americans are at risk of going broke in retirement — and that’s the good news
Mistake No. 7: Having orphaned accounts
Most Americans these days spend just a few years in any one firm. We hold 10 jobs by age 40 and 12 to 15 jobs in a lifetime, according to government data. In many of those jobs, though, we do last long enough to start a 401(k) — and then leave it behind.
Too often, those orphaned accounts are frittered away in high-fee plans.
Read: 401(k) accounts need to be easier to move from job to job
Having multiple 401(k)s is risky in another way too. They likely are invested in very different ways. You might have been mostly in stocks in your 20s, then in a 60%-40% mix of stocks and bonds in your 30s. Then maybe back to mostly stocks during a time when the economy boomed. Figuring out what you own now, and if the risk you take is appropriate, is nearly impossible with scattered money.
Better to roll those old balances over into an IRA and understand your real investment risk. Properly reinvested into a single account, it becomes much easier to choose investments for a portfolio that fits your long-term goals while keeping costs down.
Small problems such as missing matching money and high fund fees add up to big dollars over decades. The key is to take control of your financial future by paying attention to how your money is managed, no matter what stage you are in your career.
Your future, retired self will thank you.