Smart401k Blog

Are You Your 401(k)'s Worst Enemy?

by David Roberson | Jan 29, 2016

What do Congress, Barack Obama, fees and Godzilla have in common? A quick Google search will tell you that they’re all enemies to your 401(k) account. (We might have made up “Godzilla,” but you get the point.)

Over the last few years it seems like our 401(k)s have developed a long list of “enemies” trying to steal from it. Stories detail how these entities are trying to take every penny of your 401(k) nest egg. But what all these tales seem to gloss over is that the biggest enemy to your 401(k) is much closer to home – it’s you. Yes, you, the everyday American retirement saver. The truth is, your behaviors could be causing much greater damage to your 401(k) plan than Godzilla ever could.

Let’s take a look at the behaviors that could be sabotaging your retirement savings efforts – and what you need to do to go from “enemy” to hero:

Leaving your 401(k) at its default settings.

How you’re the enemy: Whether it’s a default contribution amount or investment lineup, leaving your 401(k) plan at its default settings can cost you dearly. For example, increasing your contribution amount by just 1.0 percent each year (versus keeping it at your original contribution level), could cause you to potentially miss out on $475,000 or more![1] As auto-enrollment in employer-sponsored retirement plans increases, it’s not hard to guess that these 401(k) investors are likely not checking their contribution rate, let alone making sure their investment lineup is right for their goals.

How to become the hero: Make it a point to increase your contribution amount each year until you reach 15.0 percent of your income (or the annual maximum set by the IRS, if it comes first). An auto-escalate feature, if available through your 401(k) plan, makes this easy. If not, simply set annual reminders to increase your contribution rate by 1.0 percent. It’s likely you won’t feel the difference in your paycheck, but the impact on your nest egg will be noticeable come retirement.

Cashing out a 401(k) when you switch jobs.

How you’re the enemy: This is a potential enemy for many, but especially for younger savers who tend to switch employers more frequently. In fact, more than half of Millennials report having cashed out a 401(k) when changing jobs.[2] Cashing out a 401(k) balance of $20,000 could cost you $6,000 in penalties and taxes alone[3], not to mention the loss of future returns that could make an even bigger difference to your retirement lifestyle.

How to become the hero: Instead of cashing out, roll over your old (401)k into your new employer’s plan or an Individual Retirement Account (IRA), which can help you avoid the tax implications and penalties associated with a 401(k) withdrawal. An IRA will typically allow a wider range of investment options, as well as more flexibility when it comes to making withdrawals. However, keep in mind that you will be solely in charge of managing the account in addition to your new 401(k), which could require more homework and dedication. If you prefer all your retirement funds in one place, you might want to move the money directly from your old 401(k) into your new 401(k), if allowed.

Chasing returns and trying to time the market.

How you’re the enemy: Morningstar’s latest Investor Returns data showed that at the end of 2013, the 10-year annualized difference between the average investor returns and the average fund returns was 2.49 percent. For a 401(k) balance of $100,000, that could mean losing out on $2,490. The main cause? Bad timing fueled by emotions. Now, $2,490 may not seem like much, but keeping up the same behavior over time means that $2,490 loss could turn into much more.

How to become the hero: Too often investors are tempted to try to replicate upticks and avoid market losses by changing their investment allocation. Rather than being concerned with day-to-day market fluctuations, focus on your long-term strategy and take advantage of dollar-cost averaging, a simple practice that involves putting a set amount of money each month into your investment and retirement accounts. Dollar-cost averaging takes the emotion out of investing because no matter what direction the market is going, you won’t waver from your investing plan.

It might seem as if enemies to your 401(k) are running rampant, but if you work on being a hero to your retirement plan, you’ll have a much better chance of increasing your nest egg and funding the retirement of your dreams.

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