035 – Top Ten 401(k) Pitfalls You Should Avoid

1. Not contributing anything to your 401(k) If your company offers a 401(k) plan with a match, and you are not contributing to the plan than free money is left sitting on the table.  Let’s say, for example; you make $50,000, and the company matches up to 6% of your salary.  If you are not contributing to the 401(k), then you are leaving $3000 ($50,000 x 6%) of FREE money on the table.  Picture a bag of money sitting on the table for you.  Do you want it for free or do you want just to leave it sitting there and go on your way?  I know the answer and so do you.  If you are unsure of the matching percentage in your employer’s plan, go to the Summary Plan Description (SPD) to find out.  If you do not have a copy ask human resources, they will provide a copy for you. 2. Only saving up to the employer match Congratulations, you are saving enough in your 401(k) plan to receive the match.  Contrary to popular opinion, this is not a retirement plan.  A vast majority are saving just enough money to get that free money.  Instead, calculate your retirement needs and save based off of your comprehensive plan that includes everything that is financially important to you.  For most people, just saving enough to get the company match will not be sufficient, and they will end up outliving their money.  A good rule of thumb is to save at least 15% of your gross income, and that is what I teach anyone serious about saving for retirement.  However, if you are older and have not saved adequately, chances are you may have to save 20% or more in your retirement accounts. 3. Not knowing the total operating expenses in your 401(k) plan. Controlling the stock market is not possible, but expenses are something you can control.  Unfortunately, not all 401(k) plans are created equal.  Usually, smaller companies get hit with more fees because the total amount of money in the plan is low.  Larger companies with 401(k) plans tend to have fewer fees.  The only way to find out about the 401(k) fees is to take a peek under the hood.  Keep in mind that expenses come in many ways, shapes and forms and there are times we do not dig deep enough.  Most of us look at the fund expense ratios and believe those are the only fees in the plan.  However, the day-to-day operation of a 401(k) plan involves fees for core administrative services--such as plan record keeping, accounting, legal and trustee services.  Thankfully, the government has made the total fees more transparent in recent years.  The first place to find out what your total expenses are in the plan is your annual fee discourse statement, but these disclosure statements are not always uniform from 401(k) to 401(k), and some do not list these administrative expenses at all.  If you can’t find what you need in your fee disclosure statement, go to your human resource or employee benefits department and asking for a breakdown of the fees you are paying. You can also call your plan’s record keeper. 4. Asking your co-workers to pick your investments I wish there were a stat for the percentage of workers that lean over to the cubicle next to them and ask which funds in the 401(k) to pick.  Selecting investments is not a light decision.  Your investment mix depends on some factors that are most likely much different than the person next to you.  Everyone has a unique blend of emotional risk tolerance, risk capacity, and dreams which determine the overall risk measure in each portfolio.  Get professional help determining your risk and goal factors so you can get dialed into the mix that is best for you.  I do have one warning for you, getting professional help from the investment advisor watching over the plan may not be in your best interest.  Sometimes, these consultants are paid higher commissions or kickbacks depending on which funds you are selected...