3 Ways to Leave 401(k) Money On the Table
When most investors hear about leaving money on the table, they usually think about sitting out a market run or some other missed chance for higher returns. But there are plenty of other ways you could be failing to make the most of your investments, including your 401(k).
Consider the plight of "Joe Investor," a typical saver trying to reach his retirement goals. Unfortunately for Joe, he fails to complete some simple tasks that could better help him reach those goals. Here are a few behaviors that are costing him:
Not Getting the Full Employer Match
Getting the most bang for your buck is important when saving for retirement. One of the easiest ways Joe could do this is by taking full advantage of his employer match. Let's say his employer offers a 50 percent match on contributions up to the first 6 percent of his salary.
Currently Joe is contributing 4 percent of his annual $50,000 salary to his 401(k). Combined with his employer match of 2 percent, he's is making an annual contribution of $3,000. If Joe increased his contribution amount to 6 percent, he would start receiving his full employer match of 3 percent, pushing his annual 401(k) contribution to $4,500. Over 35 years, assuming a 7 percent average annual return, the difference could mean more than $220,000 for Joe's retirement nest egg.
If you're not currently getting your full employer match, create a plan to incrementally increase your contributions until you reach the full match -- but don't stop there! As your budget allows its, keep increasing your contribution percentage until you reach the recommended rate of 10 to 15 percent. By increasing your contributions even 1 percent annually, you'll stash away more money without feeling a big difference in your take-home pay.
Not Reviewing Fees
Joe is like many 401(k) participants in America: blissfully unaware of the fees he is paying in his 401(k). Unfortunately for Joe, this could be a huge drain on his retirement savings. According to the Department of Labor, paying 1 percent more in plan expenses over 35 years could decrease your retirement savings by almost 28 percent. Assuming Joe has a current account balance of $25,000 with an average return of 7 percent, a return of 6.5 percent instead of 5.5 percent could mean a difference of greater than $63,000.
While every 401(k) plan has fees associated with it, new regulations put in place last year made it easier for participants to find out just how much they're paying. Take time to review your fees, and if you aren't happy with what you're paying, speak with your employer about ways to lower them -- or possibly look into another investment vehicle, such as an Individual Retirement Account.
Not Looking For Help
Joe thinks he is a pretty savvy investor. He watches CNBC and hops online to stay up to date on the latest financial news. Plus, he has great instincts when it comes to investing. Joe decides to choose his 401(k) investments alone - but it could cost him. A recent survey by Aon Hewitt and Financial Engines revealed that those "seeking help" with their 401(k) saw an annual return nearly 3 percent (292 basis points) higher than those who didn't. This can cost Joe big over time. For example, take $10,000 of Joe's nest egg to invest. Based on the median annual returns noted in the study, with help he could have $71,400 after 20 years, versus just $42,100 if he went at it alone. That's a possible difference of $29,300.
Look for help with your 401(k) investing decisions. Just be sure you are looking for help in the right places. Many 401(k) plans now offer in-plan investment advice and resources to help participants. Joe is headed in the right direction with his retirement plan, but a few bad actions are costing him. Add it all up and our fateful fictional saver is leaving more than $312,000 on the table. While these tips can help you avoid the same fate as Joe, investing comes with risks and there are no guarantees, but you can best position yourself by optimizing every part of your 401(k) plan.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.
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