401k Plan Mistakes: Top 4 Common Mistakes to Avoid

Since the advent of 401k plans in 1981 making mistakes in 401k plans have become commonplace. Let's take a look at four common mistakes we can avoid.

#1 Chasing Returns

Chasing returns is as common as trying to keep up with the Jones’. Chasing returns means looking at your yearend statement only to realize your mutual fund only gained 5% when other funds gained 25%. The logical step would be to move all your money into the mutual funds which gained 25%. Unfortunately going after last year's “hot” investment is the wrong choice.

The reason is the mutual fund you were in last year performed poorly due to the economy and the sector such as large companies. For example, large companies may have been on a downturn while small companies were the top investment area for that year. However, the next year the opposite may be true when large companies are on the upswing and small companies lagging.

A good investment strategy would be to have a combination of both small and large company mutual funds. The reason is both will not be up or down the same each year. Since we do not have a crystal ball and know exactly which mutual fund will be high for the year picking both is a good strategy.

#2 Not Naming Beneficiaries

Not naming beneficiaries is common mistake for many single or divorced couples. The reason married couples are not included is due to the fact federal law makes your spouse the default beneficiary automatically. However, when you are single you must name someone or the money will be paid to your estate.

Divorced couples do one of two things with their 401k beneficiaries. One, they remove the ex-spouse off the 401k plan, but fail to name children or a relative as a beneficiary. Two, they forget or believe changing the beneficiary is someone else's job such as the divorce attorney or the court.

Not naming or changing a beneficiary can create tax con.

The most difficult circumstance would be ALL TAXES would be due on a 401 when a beneficiary is not named. The money is payable to your estate and would lose any tax benefits.

#3 Not Saving Enough

Social Security will not be enough for most people to live off of during their retirement years. We all need to be proactive and start saving more money in our 401k plans. I have seen people saving $50 a month and believe this is adequate to meet their retirement needs. Unfortunately and fortunately many will be living up to 30 years or more during their retirement years.

A recent study stated a couple retiring today at age 62 have a 50% that one spouse will live to have 92 and a 25% chance one will live until age 97. A question you have to ask yourself is whether or not your retirement plan is taking into account 30 years of needed retirement income.

Depending on your age you should look at saving 10% to 20% of your monthly income in retirement accounts. The retirement accounts would include a 401k plan, Roth IRA or Traditional IRA. The government is giving us the tools to save a lot of money for our retirement. Our job is to make use of the plans and save our money.

#4 Leaving Money in Work 401k Plan After we Leave

Over the past five years there have been a lot of people changing jobs due to shutdowns and layoffs at companies. During this time many people have left their 401k money at the company. The reason many left their money in the 401k plan was due to the fact they do not work with a financial advisor or know how to move money into an IRA.

Well I am here to tell you it is easy and necessary. Usually the company which handles the 401k such as Fidelity or Vanguard will allow you to rollover your 401k money into your own IRA. Moving the money directly into an IRA will not cause a taxable event. However, if you request the 401k provider to send you a check directly to you they are required by law to withhold 20% for taxes.

The necessary part comes because once you leave the company you may not receive information on any changes in the 401k plan. The second reason is if you move your company may not be able to keep track of your new address and you no longer receive statements.

A third reason is if your previous employer goes out of business you may lose access to your account for several years. Now the money will still be yours, but if need to change investments or take money out this will not be possible. The 401k plan is usually frozen for two years or more until a custodian is appointed to distribute the money from the 401k plan.

Conclusion

There you have four common mistakes which can be easily avoided. Remember 401k plan management is still your responsibility even though your company sponsors the plan. Take time to learn from these mistakes so you can reach your retirement goals and dreams.