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Do You Make These 4 Common 401k Mistakes?

September 14, 2009


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We all make mistakes – some of them are just more costly than others.

When it comes to our retirement savings there’s a host of mistakes that could cost you.

Because companies are shifting the responsibility of retirement on the employees, it’s vital to correct any of these mistakes as quickly as you can.

Photo Credit: Engineering Daily

1. Bad Methods for Choosing Funds

I’m just not sure which funds to choose so I picked what did well last year

Perhaps you’ve found yourself saying that before.  Picking funds based on past performance is a losing proposition because past performance is no guarantee of future results.

An all-star fund could turn into a dog for a variety of reasons.  Don’t rely only on past performance to make your decisions.  

I didn’t know what to pick so I asked my co-worker what he did.

Bob might be a great guy, but he could be a total goofball when it comes to investing.  Sure, he talks a good game, but your needs and goals are different.  Don’t base your investments on someone else.

I figured I’m aggressive so I just went with a more risky stock fund

It’s OK to be aggressive, but using only one or two funds will typically increase your volatility and expose you to greater risk.  You need to diversify the holdings.

2. Not Diversifying Your Investments

Don’t put all your eggs in one basket. 

Diversification simply means spreading your money over various types of funds and asset classes (i.e. small, mid, and large sized stocks etc.).

The reason you want to diversify is because we don’t know what will go up or down in any given year.  You can take advantage of rising stars and also soften the blow on investments that are stinking it up.

Check out MSN Money’s Asset Allocator tool, which is a good start if you are unsure what type of allocation to use to diversify your account.

3. Not Knowing Your Risk Tolerance

I want to make big returns in my 401k without much risk

Really?  Let me know when you find something like that because I’d like to use that too!

Of course we all want to make good returns without much risk, but those investments don’t exist – if they do, they are typically too good to be true.  (Can you say – Bernie Madoff?)

You need to understand your risk profile and how that impacts your decision-making with your 401k funds.

For guidance in this area, here are five questions to help determine your risk tolerance.

4. Not Paying Attention to Company Match

 Although the recession has led many companies to forego their 401k matching programs, there are still some who offer some sort of match. 

A big mistake often made is not knowing what kind of match the company is offering resulting in leaving free money on the table.

If a company is matching dollar for dollar up to – say five percent, it’s silly to only put in three.  You’re leaving an additional two percent out there that could be matched.

At the very least you should be putting enough into your 401k to take full advantage of any money they are going to give you.

Pay attention to the details of your company’s matching program and by all means take what they are willing to give you!

Reaching retirement is up to you, so make sure you are doing all you can to correct mistakes early so you can reach your goals.


24 Comments leave one →
  1. September 14, 2009 11:44 am

    Good topic to address.

    An interesting thing about risk tolrant/risk averse is that most people believe they are more risk tolerant than they actually are.

    This can be evidence by the amount of people who chose aggressive portfolios that put a lot of money into emerging markets and the like. During the boom years they thought: “Risk doesn’t bother me!” But as soon as they stopped making 15% year over year and instead started making -15%… all of a sudden risk was an issue to them.

    When you consider how much risk you want to take on… have a heart to heart with yourself people!

    • September 14, 2009 12:17 pm

      Great point MLR! That’s so true. When things are good aggressive investors are everywhere, when things are bad they want to be conservative.

      It’s probably better for most of us to just find a tolerance we can live with in both good times and bad and not try to hit a homerun all the time.

  2. September 14, 2009 2:29 pm

    The more I read, the more it sinks in. An advisor reminded me that neglecting to name both beneficiary & contingent on your 401K/IRA costs your heirs much more in taxes. I had a beneficiary, but had to go back and name the contingent. By the way, my company wants to know why you save and invest -you may win an iPhone 3G S. Thanks for the tips!

    • September 15, 2009 5:39 am

      Natalie, that’s a great point – I could’ve made it the 5 most common mistakes as not designating a beneficiary is a big one! Thanks for bringing that up!

  3. September 15, 2009 8:40 am

    Mistake number one is understandable and that’s why I think lifecycle funds are a good option.

    A lot of people with a 401k account really don’t know anything about investing (or want to).

    • September 15, 2009 9:32 am

      Bucksome, great point…for a lot of people who don’t have time or don’t want to spend the time researching fund options the lifecycle funds make a lot of sense.

  4. September 15, 2009 8:43 pm

    Great tips! I know a lot of people study investment options and know quite a bit about the market. They are quite comfortable investing on their own. I’ve tried this approach, but I wasn’t ever really certain I was choosing the best investments based on my goals.

    There are a lot of a good and honest financial advisors out there with years of experience. I think it’s important to seek the advice of a professional to provide some guidance in choosing the investment options.

    Your tips are a great way to lead into such a discussion with a financial advisor.

  5. September 16, 2009 8:14 pm

    I’d say the number one mistake is not investing primarily in an index fund. On average, an index fund outperforms 90% of the mutual funds on the market. I understand the attraction to actively managing your 401k portfolio. I did it for a while. But, as Warren Buffet pointed out if you don’t know what you are doing and you actively managing your portfolio you know just enough to hurt yourself. His best friend and later business partner Charlie Munger made a nice comment that if you just could not resist playing with active management that you should only do so with 10% of your portfolio. For a 401k, it sounds like playing it safe is better.

  6. October 14, 2009 8:18 am

    I say the biggest mistake is being uneducated and uniformed about hte latest market trends. Too many people relied on there money manager during the recession and did not spend enough time watching there money.

    • October 15, 2009 9:51 am

      I don’t know that it was as much not watching their own money as just being simply unaware of what their true risk tolerance was – It’s easy to be aggressive when things are rockin’ and rollin’. You’re right though, there were many folks who didn’t take the time to review investments, risk tolerance, objectives and goals to determine what they should be doing.

  7. February 2, 2011 4:06 pm

    Wow, fantastic blog layout! How long have you been blogging for? you make blogging look easy. The overall look of your web site is great, let alone the content!

  8. September 23, 2011 6:11 pm

    Nice post about Do You Make These 4 Common 401k Mistakes? « Redeeming Riches. I am very impressed with the time and effort you have put into writing this story. I will give you a link on my social media blog. All the best!


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