7 Most Common 401(k) Mistakes [What to Do Instead]

There are common 401(k) mistakes we see investors making over and over again – from failing to rebalance to not keeping up with legislation.  

The 401(k) is one of the biggest assets people have in retirement. 

It’s not enough to think you’ll be ready to retire simply because you regularly fund your 401(k). Far from it. 

Keep reading for the 7 most common 401(k) mistakes and what to do instead. 

#1 Underestimating the REAL Cost of Retirement

There’s a big discrepancy between what people think they need in retirement and what they actually need. 

The wider your gap, the more likely you are to struggle in retirement.

When planning how much you need in retirement, there are numerous factors to consider: When you plan to retire, your lifestyle expectations in retirement, and your health.

You also must consider the rising cost of medical care, transportation, housing, food, and long-term care. 

And don’t forget inflation. 

We recommend you check out this article for a breakdown on the cost of retirement in 2023. 

Based on that info, revisit your retirement plan and make adjustments accordingly. 

#2 Having a Set-It-and-Forget-It Strategy to 401(k) Savings

A set-it-and-forget-it approach to 401(k) savings is not in your best interest. 

A whole lot can happen in the markets, legislation, and tax policy between the time you set up your 401(k) and the time you retire. 

Just like taking a road trip from Texas to Florida, if there is a roadblock preventing you from reaching your destination (or one that could significantly slow you down), you need to make changes to your route in order to reach your destination. 

The key to avoiding these common 401(k) mistakes is to get engaged with your 401(k) plan – and your retirement savings overall. 

Continue reading blogs like this. Attend seminars and online trainings. Read books on the subject. 

The more you educate yourself, the more confident you should feel about your retirement future.

Also, open and read your statements – and make sure you understand what you’re looking at. Doing so will help you determine whether or not you’re on track to meet your financial goals.

Check out our 2-part video series on how to read and understand your 401(k) statement.

#3 Ignoring New Legislation That Impacts Retirement Savings

Failing to keep up with new legislation that impacts your 401(k) savings may be more harmful to your retirement than you think. 

That’s why you need to stay on top of it. 

Here’s a recent example of just how important this is: The SECURE 2.0 Act was signed into law December 29, 2022, and it introduces major changes to the retirement system and how you save for retirement.

Let’s say you’re 60 and you’re planning on maxing out contributions every year until retirement based on the over-50 catch-up contribution limit. 

The SECURE Act 2.0 increased the catch-up contribution limit for employees ages 60 to 63 who want to contribute more. Starting in 2024, you can contribute $10,000 or 150% of the standard catch-up amount. These amounts will be adjusted annually based on the cost of living starting in 2026. 

Also, under the new law and starting in 2024, catch-up contributions to 401(k) plans must be designated Roth contributions if the employee’s compensation from that employer was more than $145,000. 

If you weren’t aware of this new legislation, you would not be planning properly to max out contributions.

[Related Read: SECURE Act 2.0: How It Affects Your Retirement Savings]

#4 Relying Only on Target Date Funds

While target date funds have become extremely popular with 401(k) participants in the past few years, it is essential that you diversify your account, and not rely solely on these financial vehicles. 

Target date funds are based on the date of retirement, and they fail to take into consideration that not all investors are created equal.

If you’re younger and plan to retire in 2060, you’re told to select a 2060 fund. If you’re wanting to retire in 2040, you’d select a 2040 target date fund. 

What this means is that investors are grouped solely based on their expected retirement date–location, age, profession, salary, risk tolerance, goals, and objectives are NOT taken into consideration. 

Because everyone has different goals and objectives for the future, there is no one-size-fits-all way to invest in a 401(k) plan. 

In addition, target date funds do not appropriately manage downside risk. 

They may often underperform in good markets and do a poor job of managing downside risk during tough markets. 

If you are currently in a target date fund, we suggest moving away from this option and better utilizing all the options available in your workplace retirement plan. 

[Related Read: 3 Ways Target Date Funds May Hurt 401(k) Investors]

#5 Not Rebalancing Your 401(k)

If you have a set-it-and-forget-it approach to your 401(k), chances are you aren’t rebalancing. 

This common 401(k) mistake can cost you more than you might realize because you may be missing out on earning more and keeping more of your hard-earned retirement savings.

Rebalancing your 401(k) is the process of realigning the weightings of the assets, or investments, in your portfolio. 

This means you periodically buy or sell assets in your portfolio in order to maintain the initial desired level of asset allocation. 

Let’s say you set up and invested money in your 401(k) in 2012, and your original asset allocation target was to have 60% in stocks and 40% in bonds. And let’s say the stocks performed well over this period of time. 

If you never rebalanced your account and stocks performed far better than the bonds, you’d have much more money invested in stocks. This may increase your asset allocation to 80% of your portfolio in stocks and only 20% in bonds. 

While your account may have posted high returns during this period, you are now at a higher risk level than you originally selected. 

And, should the market drop and stocks take a dive, your retirement savings could potentially suffer major losses, and you might lose some (or a lot) of your hard-earned retirement savings. 

[Related Read: What Every Investor Needs to Know about Rebalancing a 401(k)]

#6 Not Saving Enough

This one is obvious, but not enough 401(k) investors do it – which is why it’s on our list of the most common 401(k) mistakes. 

Ideally, you want to max out your contributions. This year you can contribute up to $22,500 for a 401(k), and if you’re 50 and over, you can put in an additional $7,500 – for a total of $30,000.

Maxing out the yearly limit may not be realistic for many 401(k) investors. 

See if you can increase your contributions by 2%, 3%, 5% or more. 

If you’re thinking 2% isn’t going to move the needle much – just remember, every little bit counts. 

Even if you’re only able to contribute a small amount each month, it’s better than nothing. The key is to make a plan and be consistent because time + consistency builds wealth.

#7 Not Getting Professional Help

In addition to managing your investments and quarterly rebalancing your 401(k), getting help with your 401(k) may also help you stay on course to meet your retirement goals. 

However, there are a lot of 401(k) investors who either don’t have the time or don’t care to manage their 401(k)s in order to maximize returns.

We get it. And that’s why we do what we do! 

When you have professionals personally managing your 401(k), like we do at 401(k) Maneuver, the focus is on the outcome, not a cookie-cutter approach to investing based on your retirement date.

We believe there’s no such thing as a one-size-fits-all approach to saving for retirement. 

We are not robo advisors – we are real people making decisions on your behalf. And, as a fiduciary, we’re obligated to act in your best interest with the goal to improve your account performance so you have more money during retirement. 

Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance. 

You don’t even need to move your 401(k). Keep it right where it is, and we do the rest. 

Find out how we can help you grow and protect your 401(k). Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.