If you're in the lucky half of Americans who have access to a 401(k) retirement savings plan, you probably understand its appeal. Your money grows tax-free until withdrawal, contributions are automatically deducted from your paycheck and you might even get free money in the form of an employer match.
But many Americans are making mistakes with their 401(k) accounts that could be costing them some serious dollars. Missteps range from failing to contribute enough to receive an employer match, to overpaying in plan fees and costs. As the economy booms and the average 401(k) balance rises, these mistakes could be having an even more pronounced effect on Americans' retirement accounts.
Are you missing out on your employer match because you're not contributing enough? A recent study from personal finance website MagnifyMoney shows that roughly 20% of Americans are failing to receive their full 401(k) employer match by not contributing enough.
With the average employer match now reaching an all-time high of 4.7% of a worker's salary, according to Fidelity Investments, that could result in a cost of tens of thousands of dollars over the typical worker's career — and much more, when compound interest is considered.
Remember, a match is free money you're leaving on the table if you don't take advantage of it. By not contributing enough to secure the match, your overall compensation is lower. Think of it as giving yourself an unintentional pay cut. Cut back on whatever you need to in order to contribute enough to get that full match. You're opting for lower total compensation, otherwise.
Are your 401(k) fees too high? Recent data show that the average person pays about 0.45% on their balance annually in plan administration fees and costs. And as the average 401(k) balance now exceeds $103,000, the costs and fees associated with retirement plans become an even more significant consideration. Even a fraction of a percent more in fees can eat away at your investments and mean thousands less in retirement.
Speak with your plan administrator or human resources department to understand your plan and investment selection fees. Choose quality mutual funds or exchange-traded funds with low fees. The average equity mutual fund fee in 2018 was 0.55% and for bond funds, it was 0.48%, according to the Investment Company Institute. Index mutual funds should be even lower. The average fee for a target date fund — the popular 401(k) option that uses a variety of individual mutual funds matched to your risk profile and expected retirement age — was 0.40% in 2018.
If you're considering switching employers, consider the difference in fees between your existing plan and new one. You might do better by keeping your existing 401(k) with your old employer if it offers significantly lower-fee choices.
Another common mistake: failing to regularly increase your contributions. Increase your contributions by at least 1% each year until you hit a target goal of 15% to 20% of your income, according to Fidelity. Otherwise, your contribution level may not keep pace with your real-life living standard, and that could become problematic at retirement, when you may be forced to make do with less.
Keep in mind that the goal of 15% to 20% of income saved for retirement also includes any employer match, so don't be alarmed if the goal seems too ambitious.
Taking out loans on a 401(k) or cashing it out altogether is generally a terrible idea, for a number of reasons. Loans from a 401(k) not only require you to repay yourself with interest, but in many cases, you'll also have to halt any contributions until the loan is repaid. That reduces your retirement savings in two ways. Even worse is cashing out a 401(k), which will incur taxes, plus a 10% early withdrawal penalty.
These mistakes not only bring hefty fees, but raid the very retirement savings that are your precious safety net in your golden years. Don't think of your 401(k) as a piggy bank — that's what savings and brokerage accounts are for. If you switch jobs, don't cash out your 401(k); instead, roll it over into your new plan or into an individual retirement account.
If you've switched jobs frequently in your career, you may be ignoring — or have entirely forgotten — an old 401(k) plan. (Unfortunately, there's no central repository to search for orphaned plans, so you'll have to contact each previous employer individually to check.)
Rolling over old 401(k) balances usually can't be done in a fully digital fashion; it can be a tedious process of phone calls and some paperwork. Still, it's a small inconvenience that's well worth the benefits you'll reap. Your 401(k) plans should be monitored frequently — accounts need re-balancing, your progress and performance should be tracked, and you should stay abreast of fees.
Experts recommend you have no more than two to three retirement accounts at any time. To the extent possible, consolidate them into a rollover IRA, and only keep old 401(k) plans active if they offer excellent investment options and low fees that you can't enjoy in an IRA.
Your 401(k) is one of the most precious sources of financial security you're likely to enjoy, so treat it kindly. If you contribute diligently, choose low-cost funds and respect the integrity of your savings, it'll be there to cushion you for many comfortable years in retirement.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.