401K Mistakes

Kevin Wray Academy, Finance 101, Income Planning, Income Planning, Insight Investing Articles, Investing & Planning, Retirement, Retirement Planning, Risk Management

Saving in your 401K can be an easy and painless way to build your retirement savings. Because it’s so easy and painless, it can also be ignored for long periods of time, which often leads to mistakes like…

Leaving money invested in a former employer’s 401k plan instead of rolling it over into an IRA

If this describes your plan of action, you are limiting yourself to just the investment options and investment company that your old employer uses.  Instead, you can roll over your 401k directly to your own personal IRA where there is a whole universe of investments available to you. In most cases you will have a better selection of investments that will improve your situation and have better diversification.

You can consolidate with other IRA’s and make record keeping easier.

Once you have rolled your employer plan to your own IRA, you can start to do some tax planning such as converting some or all to a Roth.  With today’s low tax environment, it is a great time to investigate this and see how it may benefit your situation.

Assuming that the 401k plan views you as the client (you’re not—your employer is really the client)

If you leave your 401k in your previous employer’s plan, they will have control of the investment selections, fees and most other aspects of the plan. Since nobody can care more about your retirement than you do, you need to be the one in charge of your own destiny. You should make the decisions about your future investment options and the direction of your retirement. You can do this by rolling your 401k plan into an IRA.

Failing to re-balance often enough

Rebalancing is critical for your portfolio. Rebalancing will help you to buy low and sell high. Let’s say you have a 60% stock and 40% bond portfolio. The stock portion grows to 65% because the market has performed well, and the bond portion has shrunk to 35%. Rebalancing will force your investments to sell 5% of the stocks to bring down your balance to 60% (selling high) and buying 5% more in bonds to rebalance to 40% (buying low).  Note that this is a hypothetical example.

Sticking all your money in a target date fund and assuming that your account is now “customized” to your needs

Almost all mutual fund companies offer target date funds. Target Date Funds (TDFs) mix several different types of stocks, bonds and other investments to help you take more risks when you’re young and gradually get more conservative over time. TDFs are different for each company. For example, a Fidelity 2025 fund and a Putnam 2025 could have a totally different ratio of stocks to bonds. One fund could have 60% stocks and 40% bonds. The other fund could have 40% stocks and 60% bonds. Most TDFs are structured differently from all other TDFs. These funds also do not address how you will take income when the time is needed.

Assuming your fees and costs are minimal, since you never see them on your statement

Over time, fees can make a huge impact on your account value. Typically, the only fee you will see on your 401k statement is the expense fee. It may say something like 0.55%. But the fees do not end there . According to the Forbes article1, “The Real Cost of Owning A Mutual Fund”, the average cost for a mutual fund is between 3.17% to 4.17%. Those percentages are a long way from 0.55%. There are multiple fees that are not disclosed and if you wish to find them, you will have to do some digging to uncover them. The website www.personalfund.com can help you uncover hidden fees. On the website, you input your mutual fund ticker symbol and the site will break down the fees in your mutual fund.

If you have any questions, or you would like to discuss your own 401k (or 403b, TSP, 457), please feel free to reach out to our team and we will be happy to help in any way we can.

1 Ty A Bernicke (April 4, 2011). The Real cost of Owning a Mutual Fund, Forbes