3 Big Mistakes People Make with their 401k and Don’t Even Know It

“Risk comes from not knowing what you’re doing.” —Warren Buffett

401ks are complicated. Your company offers one (yay!) but then you are tasked with all the hard stuff. Contribution, diversification, research and rebalancing. Who has the time to do it all?

Giraffe recently approached the experts at blooom, a Registered Investment Advisor seeking to help the average American retire better, by providing 401k strategy and management at a low, flat rate, to get a few answers for you.

We asked the blooom 401k experts to identify the common mistakes people make with their company sponsored 401k retirement accounts, so you can easily avoid them. Here are the top 3 mistakes that they have identified.

401k Mistake #1: Not meeting your company match
This is one of the most egregious crimes against retirement. :) If you are lucky enough to have access to a defined contribution plan and your employer will match a percentage of the earnings you put in, you should try your darndest to invest enough to meet your company match. Do so, and you are essentially earning FREE MONEY.

According to the Bureau of Labor Statistics, forty-one percent of workers get a matching contribution on the first six percent of their earnings contributed to the plan. So if you are lucky enough to have access to a company match, meet it!

401k Mistake #2: Investing Too Conservatively or Aggressively
How do you know which types of funds to invest in your 401k?

The old rule of thumb was that if you subtract your age from 100, then that should be the percentage of stocks in your portfolio. For example, if you were 20, then 80% of your portfolio would be in stocks, and 20% in bonds.

BUT with Americans living longer, and empirical evidence of higher long-term returns from stocks vs. bonds, this framework is a bit outdated. Instead, raise of using 100 and subtracting your age, use 110, or even 120. So, your portfolio would have 90-100% of stocks. To find out the ‘why’ behind this investment strategy, read this article from Investopedia.

Then on the other hand… you literally just read not to play it too safe. But here’s why you should not be too reckless with your investments. Say you’re less than 5 years away from retirement. Blooom’s recommendation is to invest around 40% of your 401k in bonds, with the other 60% in stocks.

As folks start getting closer to retirement, their nest egg needs to be safer from a market crash or a decline in stock prices. That’s why blooom suggests you monitor and periodically rebalance your accounts as they get closer to retirement, bringing down the percentage of stocks and increasing bonds.

If you are wondering if you are making the mistake of not investing properly, do this 401k check-up. It’s helpful. And free. (Yes, really.)

401k Mistake #3: Racking Up Hidden Fees
Of the more than 5,500 people who took a blooom survey1, only 18% said that they minimized hidden investment fees in their 401ks. The remaining 82% either said “no” or that they “didn’t know.”

Unsurprisingly, most Americans do not know much about hidden fees either. According to Inc., 92% of Americans don’t know what they are paying in fees. And they cost you.

Forbes detailed an example where a 0.93% difference in hidden fees between two funds can cost up to $215,000 for a single investor. Why can such a small number have such a big cost? Compound interest – or as Albert Einstein is said to have called it, “the world’s most powerful force.”

Also, beware of target-date funds. At first glance, they seem to have everything you want in an investment: a diversified allocation that gets more conservative as you get closer to retirement – your target date. But those target-date funds often come with ridiculous fees, which end up lining Wall Street’s pockets, instead of your own.

While we are on the subject…. Here’s another mistake you should avoid when choosing target-date funds. You are generally supposed to select one and forget it but in an analysis of our data, more than 37% 2 of people had selected more than one target date fund.

At the end of the day…
There are plenty of mistakes you could be making with your 401k, but if you avoid these three you’ll be investing in the right direction. Don’t have the time or urge to do it yourself? There are plenty of personal advisors or relatively inexpensive tools like blooom to help.

1. Based on a quiz taken by 5,668 blooom clients from June 23, 2017 to August 29, 2017.
2. Based on blooom client data as of August 28, 2017.italic text