Fixing Common 401(k) Mistakes

July 27, 2018

5 things savvy participants should do.

Nationwide, there are over 50 million people participating in a 401(k) plan. ^[1]

Does that include you?

We hear from a lot of folks, usually callers to Money Matters, our long-running financial topic radio program, who tell us that they haven’t reallocated their 401(k) plan investments in years or even decades.

These people fall into the “set it and forget it” category, and believe that just contributing to a plan is enough.

But in the new era of retirement, where every dollar counts, participation trophies won’t see you through a 30-year post-work life.

You need to strategize, cut costs, and maximize your investments to help ensure you save enough to retire well.

What follows are 5 things you should be doing with your 401(k) that could help you retire better.

1) Downshift away from too much company stock.

Here’s a scary stat: 5% of all 401(k) plan participants have more than 20% of their holdings in their employer’s stock. ^[2]

If you work for a publicly traded company, the odds are pretty high that you receive shares as a form of incentive or compensation.

Owning lots of company stock may seem like a sensible thing to do, but do you really want your paycheck and your retirement savings all tied to the same star?

As the employees of Enron and GE have all found out, even the stock of “name” brand companies can quickly go south.

If your company suffered a sudden reversal, say, a class action lawsuit, or if it ran afoul of the government, you could lose both your job and a significant portion of your savings overnight.

2) Don’t act like a broker.

With interest rates still low, some high-risk investors turn their plans into vehicles for high-intensity trading.

But 401(k)s simply aren’t built for this.

First, heavy trading takes a lot of experience, time, luck, and attention to detail. And unless you work in finance, it’s highly unlikely your job is going to allow you the opportunity to monitor the markets closely enough to make this practical or profitable (even if you do know what you’re doing).

Second, in most plans, more trades equal more fees. And fees (as I’ll discuss in a moment) are the enemy of returns and saving.

3) Keep fees low by comparative shopping.

401(k)s are built for the long-term. That’s why it’s important for you to work with an advisor to help find the investments with the lowest fees.

For instance, nearly identical exchange-traded funds (ETFs) can have fees that range from .04% to .4%. ^[2]

To a lot of people, at a glance, there really doesn’t seem to be all that much difference between .4% and .04%. (Which the creator of the fund is counting on.)

But that’s a massive differential that impacts your savings two ways.

First, if you multiply that fee disparity by a few hundred transactions, over a 20-year period, you’re talking about thousands of dollars. Second, that money isn’t merely gone, it’s not around to compound over time.

4) Don’t automatically leave your money in your former employer’s plan.

If you get laid off, or you take a position with another company (and even occasionally when someone retires), there may be times when leaving your 401k with your former employer makes sense.

But because virtually all 401(k)s have administrative fees—some of which are higher than others—depending on your plan, leaving your money behind could amount to thousands of extra dollars out of your pocket over time.

You may want to:

Leave the money where it is
Roll the money into your new employer’s 401(k)
Roll the money into an IRA

Also remember that, compared to most 401(k)s, IRAs offer you a wider range of investment funds, which should enable you and your advisor to create a more diversified portfolio.

When you leave your job, deciding what to do with your 401(k) is a complex issue that requires professional advice from a fiduciary advisor.

5) Focus on what you can control.

When it comes to your 401(k), there are things you can control, and there are things you can’t.

Focus on what you have power over.

For instance, you can control:

Your asset allocation
Your investment diversification
How much money you put away
And fees and costs via comparative shopping

Conversely, you can’t control:

The direction of the stock market
The economy
Which mutual funds will be hot, or not, this quarter or year

Allocate the money in your 401(k) based on your personal time horizon and investment risk tolerances, both of which are likely to change the closer you get to retirement.

Conclusion

Besides the five points listed above, there are also tax considerations, contribution amounts, rebalances, distributions, loans, withdrawals, and numerous other variables that can impact your 401(k).

Mistakes are costly.

But in today’s low-interest rate environment, leaving the fate and performance of your 401(k) to chance is perhaps the biggest mistake of all.

[1] https://www.kiplinger.com/article/retirement/T001-C032-S014-the-7-most-common-401-k-mistakes-to-avoid.html

[2] https://investorplace.com/2018/06/common-401k-mistakes-how-you-can-avoid-them/

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^✢ Scott Hanson, Investment Advisor 2005, 25 most influential people in the financial services industry. The ranking reflects 25 people who Investment Advisor magazine believes have had or will have the greatest influence on the financial services industry.

^✼Pat McClain, InvestmentNews 2014, Invest in Others Community Service Award, presented to an advisor who has made an outstanding impact on a community through managerial contributions to a non-profit organization.

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