Common 401(k) Mistakes To Avoid
Christian personanl finance blog Redeeming Riches offers four revelations on how you may be mistreating your 401(k).
The post offers standard but rock-solid advice on mistakes to avoid, such as failing to diversify investments and haphazardly choosing funds. It ends with what may be the most important piece of 401(k) advice of all — increasing your contribution to max out your employer's 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.
This assumes some employer out there still offers a 401(k) match. Many dropped the perk due to the recession, and it will be interesting to see how many reinstitute the match when things perk up.
Previously: The Basics Of Insurance, Taxes, And 401(k)s For First-Time Employees
Redeeming Riches [Do You Make These 4 Common 401k Mistakes?]
(Photo: krodinjw)
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Comments:
love the pumpkin.
@MostlyHarmless: Hey, right now just cling to the job you have and work your hardest. You'd be surprised how many people don't contribute to 401k's, even with matches. I really need to sit down and make a list of common things people miss and go through with all my clients this year during tax season.
My company rocks - I put in 2%, they put in 4.7%. And they match 1/3 of what I put in for the next 10%. So, I put in 12%, and they put in 8.03%.
I LOVE my company.
my companies matches whatever I put in up to 5%, well they did up until last year, though they claim they're reinstating it due to the economy getting better (this announcement btw came 3 months ago) apparently they know something the rest of us don't.
Either way when i graduate and get a job as a teacher they have pensions (hopefully :P)
My view: If your company matches and you're not taking all of it, it's not like leaving free money on the table. It's like leaving part of your paycheck on the table.
401Ks is where all the $ is flowing into stocks causing them to inflate. Just be aware what over inflating stocks will do over time. Has anyone noticed how the structure of 401K promotes massive amounts of money going in, but really doesn't allow money to be moved out? Just an observation.
Translation: They're re-instating it because the people that keep the company going told HR they're leaving due to better job offers elsewhere.
Which roughly translates to the economy getting better, except with the side-effect of cheap companies losing the people who can get better jobs (these are usually the employees you want to keep).
I have a feeling other companies will be feeling the same thing, as employment churn will definitely rise this year considering almost all companies thought they'd be able to pull some fast ones like this and get away with it unscathed. The net result, of course, is negative for all involved, but that's the way she goes...
My company used to be 5%, but they knocked it down to 3% this year, with the excuse of "recession". Nevermind the fact we are busier than ever, and have gained many clients. It's kind of crazy how busy we are really. It wasn't necessary to cut benefits right off that bat like that, and now that it is apparent we aren't affected by the recession, they should put it back to 5% (they won't though).
That being said, I was so happy with my decision to completely redo my funds when the market was at its lowest. Everyone said "leave it where it is", but I was unhappy with the performance of the fund up to that point. I split it all up into 3 different funds. The one I had it all in is up 8% so far this year. The ones I reallocated to are up 30%, 25%, and 12%.
@shepd:
Heh, I know my company did. Cut 401k contributions, pay freezes, hiring freeze, and told no bonuses. They did this at the start of the year just because they paniced at "the recession". Nevermind we never slowed down and this is actually going to be a record breaking year for us. Just goes to show...extremely poor management. Now we have 1-2 of our best tech guys looking for other jobs, and management couldn't care less. Our owners see people as cogs in a machine that can be swapped out at any time rather than valuable resources. A shame they get such hard working devoted people then drive them away.
I'd be a bit weary of the whole pension thing. In the state of Maryland, the pension fund is less solvent than Medicare and Social Security.
Also, not sure what state you work in, but most school systems are working towards removing defined-benefit plans from their retirement offerings and instead switching to 403(b) accounts. The benefit is twofold - the system saves money on overhead and you get some tax relief up front if you take advantage of it.
I worked for a company that matched 1 for 1 up to 10%...with a 7 year vest!
The vesting will get ya!
My company matches 50% of my contributions. I already maxed out this year. That means that I put in my $16,500 and my company put in $8,250. It's hard to turn down free money, even if I won't see it for a long time (I'm only 25).
Put in just enough to offset your taxes because once it is in the 401k, the IRS will take up to 30% for you to take it out before age 55. Never tie up your money unless there is an incentive to do so.
My company matches 100% up to 5%, up from 3% a year and a half ago.
My company matches 4:1 up to 2%. In other words, I put in 2% and my company matches with 8%.
The company that I started working for in 2004 has never offered a match. This is my lame excuse for not participating, which I know is a poor decision on my part.
Wow, that's not only a great plan (especially if the money is vested immediately) but great to start so early. You can't spend money you don't have!
If I can ask, in what range is your salary? Many employees in my company max out their 401(k) but all make in excess of $250,000 and are over 50 so they can go up to $22,000. I've always wondered if I'd be able to live if I maxed my 401(k) out.
Care to back that up? Also, your theory is a bit off. I don't know many 401(k) plans that offer much in the way of risk. Even the growth funds are indexed, and have a lot of limits as to the amount of active trading within that fund.
@larrymac: Seriously, just think how much money would have saved already even if you just put in 1% 5 years ago. What are you waiting for?
@DollaValueLIFO: Well this year was a special year because I took a special assignment and they paid my rent for a year, gave me a $1k allowance for a car (I simply used the car I already owned, I just shipped it there), and they gave me an $18k bonus (spread out over 2 years). My base salary is just shy of $70k but last year I made around $86k and I expect to make the same or more this year. Normally maxing it out would be a stretch, but I hope to at least try every year from now on. It's nice to already have $50k in my 401k.
The incentive, at least short-term, is the post-recession bounce. Nobody knows exactly when, but the DJIA will get back to the 14,000 levels. So when you can buy at 9,000 using pre-tax dollars AND, hopefully, get a company match on some of it, you're going to see a very quick return on that investment.
If the market stays in the toilet for another year, so much the better for you. It means you're getting an even bigger batch of cheap stock.
The down market is bad for the people who are having to draw off their retirement accounts right now, but for anyone who's 10 or more years away from retirement, it's the opportunity of a lifetime. Right now is the time to be contributing whatever you can afford.
Well congratulations to you! If you've been able to make it work you should be proud of yourself.
The commitment to retirement savings by the current group of under 40 workers would be a real boon to the long term financial health of the nation.
Just think, if we could get a good % of folks to put 10-20% of their salaries in their tax preferred retirement account, a lot of the bickering over SS would slowly slip away.
Match=lose twice as much money.
Agreed - but the kicker is that the folks drawing down their 401(k)'s now are (hopefully) retirees that have guarantees of SSB's!
When the market hit the toilet last year, we were on our honeymoon overseas. The first thing I did was buy more of my indexed funds in my Roth when we got home and am ahead 16% on those since the economy has picked up this year.
Duh.
@calquist: I do have a significant account from prior employment (which was a helluva lot more significant just over a year ago), and I have made IRA contributions. But still, I know .....
Diversification seems like a bunch of feel-good voodoo to me. I say to stick it all in the lowest expense index fund you can find and let it ride. Of course, I know nothing about this stuff so don't take my advice.
My company matches the first 3% and then 50% of the next 2% that you put in. How's that match up, considering the recession and such?
@Trencher93: Or it means a guaranteed ROI with no risk if you want to put it in one of the many "guaranteed return" options available (last I knew the one available to me was 3%).
The feds will contribute a minimum of 1% of your salary if you're putting nothing in. They will match dollar for dollar on the first 3% you put in, and then 50 cents on the dollar for the last two percent. You're better off contributing at least 5% of your pay because then you'll get all the matching from the feds.
Man, I'm getting screwed. My company only offers 3% matching, and that hasn't been reduced from anything - that's where they started several years ago.
The amusing thing is that, per my bosses' recent trip to corporate headquarters, this company wants to attract younger employees. They haven't yet figured out that their so-so benefits package might have something to do with their inability to bring in the youth.
I feel really lucky. If I put in 5% my company puts in an additional 8%.
My company used to match up to 3%, but ended that (as well as the tuition reimbursement program) last year because of the economy. Now we get subsidized gym memberships - I guess that's what happens when corporate relocates to Los Angeles. I wonder if I can expense my fake tanning and cocaine now?
@DollaValueLIFO: Just think, if we could get a good % of folks to put 10-20% of their salaries in their tax preferred retirement account, a lot of the bickering over SS would slowly slip away.
I agree. I've typically done at least 17% in my 401(k) - though currently at 10% as I'm getting ready to buy a house - and I haven't had any problems. Well, maybe not having as many shiny new toys as I'd like.
Anyway, my Grand Plan for SS (if I could ever convince a politician) would be to basically scrap mandatory SS.
For anyone (say) 50+, since they're getting close to retirement age, we'll honor SS payments for them, as they may be counting on it.
For those <50, you're going to have to start saving on your own. And apologies...because of the broken system, you'll still have to pay for those 50+ (though, ideally, it would be less than you'll pay now).
The only catch - you're required to save at least x% into your own qualified retirement account (401(k), 403(b), IRA, etc). If you do not save x%, that amount is taken at tax time and added to a low-interest bearing savings account, which you cannot access until the set retirement age.
What this does:
- Encourages people to take responsibility for their own retirement
- (eventually) you're not paying for someone elses retirement - you're only saving for your own.
@Trencher93: Sure, but you're still ahead!
I contribute $10, and the market tanks 50%, I have $5.
I contribute $10, and $2 match. After 50% drop, I have $6.
@DollaValueLIFO: Yea I currently live in NJ and if anything I'll move to CT cause my wife wants to go back home.
CT has something where you cannot contribute to Social Security if you're a teacher.
@Saboth: I told my upper management that higher freeze is a the dumbest idea during a recession especially if you think you can weather it (which was no questions to) and told them the best people will be looking for work.
You have to petition to HR/Recurrent/and Regional Management just to post a position. Gotta love it.
@theblackdog_VerifiesHisEmail:
Don't forget, the wonderful thing about the TSP is that its expense ratio is nearly four times better than the average 401k.
Mrs.LIFO is a Fed and has pretty much been the antithesis to the whole "no money in gubment work" meme. She works hard (no, really) and deserves the bumps she's been getting lately, but it is amazing how my salary has remained stagnant and she keeps going up, up, up! If only I could pick stocks like I did my woman!
The only issue with dumping the payroll tax funded account for the personal savings is the lack of employer matching funds.
I think it would need to be moved down to under 40, as saving for retirement at 49 is pretty difficult.
Also there would be questions as to what would happen to folks who save but get no matching funds. Would the 9% savings from the payroll tax elimination get scaled down to a minimum 5% match?
It's a pretty crazy system, and as someone on these boards said before - the more moving parts in any system (mechanical, financial) the more chances it will break down.
Not to be a third wheel but, um DUH! The nice thing about the match is that it is yours if you want it, consider it built in return on your personal contribution.
Too many people fear a catastrophic loss in their 401k balances and leave money on the table. Not to mention the potential tax benefit associated with the above the line deduction.
Add in the handy mental tool that allows you to forget you even got the money (applies to raises and bonuses, if you elect a %), encouraging a save-first position.
My company offers 10% matching. Frankly, it's the biggest reason I haven't gone looking for a better paying position. My 401k got murdered last year, as did just about everyone else's, but this year it's rocking out. I'm up almost 40% YTD, and a couple investments have gone up over 200% YTD unfortunately, I'm not allowed to continue contributing to those ones as they've been closed off for some reason.
@laserjobs: Incentive? laserjobs, you're nuts.
In addition to any company match, 401k's are tax-deferred plans. That means:
1. You get to earn interest on the money that would have gone to uncle Sam while it is sitting in your account.
2. When you do finally retire and take the money out, you will most likely have a lower income and will pay taxes on that money at a lower income bracket.
I'm only 26, but i'm maxing out my 401k and IRA contributions every year.
@DollaValueLIFO: I think both of you are correct. IMO, 401ks and all this hoopla about investing for retirement? Way too new in our society to even prove that it is worth its time and investment to think that you'll get out what you paid in. You lose 50%? You need to make up for that amount 100%. I save but I am not convinced by any means that I will be rich. The best investment are the ones that my older co-workers have, which us newbies are not allowed to have, and that is the old pension of the U.S. gov't. After 30 years, you get 80% of your highest yearly salary paid year after year. Now days I have to invest into our 401k-type called a TSP. It's cool, but, I won't be well off like my older co-workers.
given that the market is heading steadily downward, and that my 401k is down 40% from a year ago, I see it as good money after bad. 5% of -40% is ...fail...
Mine offers 50% match up to 6%. Not the best out there, but well, at least I have the same job i had last year, with the same pay I had last year, and the same match I had last year.
[Whether you think thats a good thing or a bad thing says a lot you.]