Do you have a 401(k) plan at work? Are you doing everything you can to save toward your retirement?
Plans usually have a matching contribution. In case you were wondering, that’s free money.
I suppose nothing in life is truly free, but in this case, what you have to do to get what’s free, is also good for you. If you save into your retirement plan, so will your employer. Can you say, JACKPOT!
It’s designed to encourage you to save for retirement, and your employer is helping you get there too. They’re matching the money you contribute, and you only get it if you contribute too.
Now let’s talk about the most common 401(k) mistakes I see take place.
The Past Performance Pitfall
The options inside your 401(k) are funds that range from stocks to bonds. Each option has a “snapshot,” along with the previous rates of return. Typically there are 3, 5, and 10-year performance numbers listed for the funds available. Choosing the option with the highest rate of return might seem like the best choice but can be misleading.
Each fund has a fund manager and his duties consist of overseeing how the fund invests. The manager can choose between stocks, bonds, money markets or various other asset classes.
Sometimes the fund manager changes because they moved to another firm, retired, got fired, or whatever, but they’re not there anymore.
Think of it in terms of betting on a sports team. Would you bet solely based on how well a team did last year? Or would you want to know which players are still on the team?
The new manager may be just as good, better or worse. Just know that that you should dig a little further and find out more.
The Many Fund Choices
Death by choices.
The number of options might seem overwhelming, but it’s easier than you think to create a diversified portfolio.
First, you may have target date funds. The easy, one-stop shop investment choice.
The alternative would be to build your allocation.
Again, it might seem like a lot of work at first, but could be worth the effort. Complete a risk tolerance questionnaire to figure out your correct target allocation. Your 401(k) provider can give you models based on your questionnaire.
When you start to choose large, mid, and small cap funds, you will likely realize you only have a few choices available for each selection.
Each is likely labeled growth, value or blend. The blended funds contain both growth and value positions. Alternatively, you can choose one of each, a growth and a value fund, to satisfy your diversification needs for each asset class.
Changing Your Allocations
You are your worst enemy when it comes to your portfolio.
Changing your 401(k) choices based on shifts in the market can be the single worst move you make in regards to your 401(k) retirement plan.
When you have a plan, stick with it.
Rebalancing your allocation systematically is encouraged but should not be done with influence from the current market condition. Remember your 401(k) is a long-term plan. Retirement is only day 1 of the next 30 years of planning.
Current and Future Allocations
Make sure your portfolio is allocated correctly.
Pay close attention when you do make changes. Check, and re-check your work. I see plans invested in all cash because it was setup incorrectly and never reviewed.
The plans sometimes have different steps for changing current and future allocations.
If you have any doubts, contact your human resources department and check your statements.
You can also call your 401k provider and have them review your allocations.
The 401(k) Roundup
Your 401(k) plan is designed to help you reach your retirement. Maximize your future by avoiding these common mistakes.