A 401(k) account can be one of the most powerful ways to save lots of money for retirement. The tax-advantaged savings account comes with high contribution limits, and you can likely get a bit of extra money from your employer just by contributing to it.
But 401(k) plans can also be fraught with opportunities to make a mistake, killing the potential returns on your savings. Here are six errors to be aware of.
1. Not maxing the company match
A majority of employers will offer a matching contribution to your 401(k) based on a percentage of your salary. For example, if you make a contribution equal to 6% of your salary, your employer might match that with a contribution equal to one-half of that amount.
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It’s typically in your best interest to maximize your employer’s matching contribution. Not doing so is like foregoing a part of your salary. You won’t find a guaranteed return on your investment almost anywhere else besides maxing out the company match on your 401(k).
2. Paying too much in fees
401(k) accounts can come with a lot of fees. If you’re not careful, you could easily pay much more in fees than you need to. It’s important to be mindful of expense ratios when selecting funds in your 401(k) plan. A good expense ratio for actively-managed mutual funds is typically between 0.5% and 1%, but index funds can get the expense ratio down to a range of just 0.05% to 0.3%.
One area where it’s very easy to overpay is when choosing a target-date fund. There are two types of these funds — one based on active mutual funds and one based on index funds. The latter is much less expensive and more suitable for the goals espoused by target-date fund investing.
If your 401(k) plan doesn’t include low-cost index funds and index-fund-based target-date funds, talk to your plan administrator about adding new options to the plan or switching your holdings to investments with lower expenses.
3. Keeping company stock
Some companies pay out their matching contribution to the 401(k) in the form of company stock. And too many people leave that stock as is instead of liquidating it and buying their own investment choices.
Investing in your employer’s stock is highly risky. You’re already inherently invested in the company since it’s your main form of income. Furthermore, keeping company stock could easily result in a portfolio that’s unbalanced, creating an even …….