Investment Blunders with 401(k) Plans Potentially Jeopardizing Your Retirement Funds

Investment Blunders with 401(k) Plans Potentially Jeopardizing Your Retirement Funds

High Fees and Neglected 401(k)s: Costly Mistakes to Avoid for a Comfortable Retirement

A well-funded 401(k) is crucial for a secure retirement, but common mistakes can significantly reduce the amount available. Here are some pitfalls to avoid and tips to help you make the most of your retirement savings.

High Fees and Missed Opportunities

High fees in 401(k) accounts can substantially reduce the amount available for retirement. It's essential to review your plan's fee disclosure statement annually to understand the fees you're paying. If the fees seem high, consider investing only enough to qualify for your employer match and save the rest in an Individual Retirement Account (IRA).

Leaving Money Behind

Not rolling over an old 401(k) when moving to another company might be an expensive mistake. There are just over 29 million forgotten or left-behind 401(k) accounts in the U.S., totaling around $1.7 trillion in assets. The SECURE 2.0 Act has tasked the Department of Labor with creating the new Retirement Savings Lost and Found Database to help reunite account owners with their forgotten funds.

Mistakes to Avoid

Experts advise avoiding eight common 401(k) mistakes when planning for or jumping into retirement. Two studies show that Americans often mismanage their 401(k) accounts, with one mistake potentially costing $300,000 over a working lifetime. Here are some mistakes to watch out for:

1. Not saving enough or consistently: Failing to contribute regularly or increase contributions over time means missing out on the power of compounding. For 2025, individuals can contribute up to $23,500 annually, plus an additional $7,500 if age 50 or older.
2. Not getting the full employer match: Many employers offer matching contributions, which is essentially free money. Not contributing enough to get the full match reduces overall savings potential.
3. Leaving a job before becoming vested: Employer match funds often vest over a period (commonly 3-5 years). Leaving too early can mean losing these matched amounts, which can reduce retirement funds significantly.
4. Taking early withdrawals or loans: Cashing out before age 59½ typically means paying a 10% penalty plus income tax and reduces future compound growth. Even 401(k) loans, though they avoid penalties, reduce paycheck take-home and potential employer contributions if missed.
5. Not knowing what you're invested in: Poor or uninformed investment choices can undermine long-term growth. Being unaware of investment allocations or fees may cause underperformance relative to potential gains.
6. Missing Required Minimum Distributions (RMDs): After age 73 (as of 2025), failing to take RMDs results in severe penalties of 25% on the amount that should have been withdrawn, which can be tens of thousands of dollars.
7. Withdrawing funds too quickly in retirement: Higher-than-recommended withdrawal rates (above 4% annually) can deplete assets prematurely, running the risk of outliving your money by 5-10 years.

Planning for the Future

In addition to avoiding these common mistakes, it's essential to have a solid retirement plan. This includes understanding the differences between traditional 401(k)s and Roth 401(k)s, knowing when you're fully vested in your employer's 401(k) contributions, and considering healthcare planning and retirement cash-flow strategies to avoid penalties and forced withdrawals.

Warren Buffett's advice for 401(k) management is to never lose money and never forget rule number 1. By avoiding common mistakes and making informed decisions, you can set yourself up for a comfortable retirement.

A well-managed personal-finance strategy could include reviewing the fees indefi (finance) business's 401(k) plans annually to avoid high costs that might impact your personal-finance and retirement. When changing jobs, it's crucial to ensure not leaving behind an old 401(k), as it could potentially amount to millions of dollars in lost assets, a mistake highlighted in the SECURE 2.0 Act.

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