Commentary: Avoid These Four Costly 401(k) Mistakes

Ford Stokes
by Ford Stokes


As you near retirement, you must make smart choices with your 401(k) plan. This is especially important for baby boomers born between 1946 and 1964. For a secure retirement, avoiding mistakes and maximizing growth opportunities is crucial. Here are some common mistakes people make with 401(k) plans and solutions to improve retirement prospects.

Mistake 1: Not saving enough for retirement

Many investors fail to save enough for their retirement and future needs. Recent data shows that the average annual employee 401(k) contribution is about $6,940, while the average annual employer 401(k) contribution is about $4,040. This may not be enough to ensure a comfortable retirement.

Solution: Maximize your 401(k) contributions. In 2024, the annual contribution limit is $23,000. People over 50 can take advantage of an additional catch-up contribution of up to $7,500 totaling $30,500, annually. By contributing the maximum amount allowed, you can boost your retirement savings and increase your chances of a financially secure retirement.

Mistake 2: Investing in target date funds

Target date funds may not be the best investment choice despite their convenience. These funds have underperformed recently and often come with high management fees. They lack customization, meaning they may not align with an individual’s financial goals and risk tolerance.

Solution: Explore other investment options that better suit your needs. Index funds can offer more options and lower fees.

Mistake 3: Taking early withdrawals

Early withdrawals from a 401(k) plan can be costly. A recent survey found that one in four boomers have already withdrawn money from their 401(k) plans, often to pay down debt or cover healthcare expenses. However, withdrawing funds before reaching 59 1/2 years old incurs an early withdrawal penalty.

Solution: Avoid tapping into retirement savings prematurely and instead focus on building a solid emergency fund. Only 34% of boomers reported having a backup plan if they’re forced to retire earlier than expected.

Mistake 4: Not seeking professional advice

Many investors fail to seek professional advice when it comes to managing their 401(k) plans. However, those who do seek financial advice tend to have larger 401(k) balances. In fact, 77% of people said they were extremely confident in their financial decisions after meeting with a financial professional.

Solution: Consult with a financial professional who can provide guidance tailored to your specific situation. Seeking professional advice can help you make informed decisions and maximize your retirement savings.

Avoiding these expensive errors can significantly improve your retirement outlook. By saving enough for retirement, choosing the right investment options, refraining from early withdrawals, and seeking professional advice, you can ensure a more secure financial future. Take control of your 401(k) plan and make informed decisions to achieve a successful retirement.

What you need to know about 401(k) fees

Now you know what can happen should you commit any major errors when it comes to your 401(k). But do you know about the fees that can accompany it? A survey found that only 27% of investors know how much they pay in fees, and 37% didn’t realize they paid. These fees can significantly impact your account’s return.

There are two main types of fees in 401(k) plans:

  • Those charged by the plan provider
  • Those charged by the individual funds

The most common fee is the 12b-1 fee, which is capped at 0.75% of assets. Additionally, some funds may impose a 0.25% shareholder services fee.

401(k) plan fees can be categorized into four types:

  • Investment fees: Fees associated with the funds in the plan.
  • Administrative fees: These fees cover plan management.
  • Individual service fees: They’re charged for specific services.
  • Custodial fees: These fees are charged by the custodian holding the assets.

The impact of 401(k) fees varies based on plan size and provider. Large plans typically have fees below 1%, while small plans may have fees between 1.5% and 2%. Even small differences in fees can significantly affect your savings over time.

While you can’t control all the fees, you can minimize fees by choosing funds with lower expense ratios. Consider your investment goals, risk tolerance, and overall return when selecting funds.

401(k) fees FAQs

Consider these frequently asked questions about 401(k) fees, both known and unknown…

Q: What are normal 401(k) fees?

A: 401(k) fees can range between 0.5% and 2%, depending on the size of the plan and the provider.

Q: How can I avoid 401(k) fees?

A: While you can’t entirely avoid 401(k) fees, you can choose funds within the plan with the lowest expense ratios.

Q: How can I find hidden 401(k) fees?

A: 401(k) fees are not hidden and must be disclosed in the plan’s prospectus. Look for line items such as Total Asset-Based Fees, Total Operating Expenses As a %, and Expense Ratios.

Taking control of your 401K is vital toward building a successful retirement. I encourage you to inspect what you expect for the performance and growth of your 401K quarterly. You are working hard to earn the money that is going into your 401K plan, it is time to reduce the fees you are paying and risks you are taking with a 401K review by a financial advisor and fiduciary. We want you to properly protect and grow your hard-earned and hard-saved wealth so you can fund your vision for your retirement!

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Ford Stokes is a wealth manager who hosts Retirement Results, a financial radio show, on the John Frederick’s Radio Network on 18 stations in 9 states on Saturdays and Sundays. He educates clients to help them invest and retire successfully. Retirement Results is an advertiser on the John Fredericks Media Network.





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