5 ways you're screwing up your 401(k)

 Photo Credit: Alisa Anton via Unsplash

Photo Credit: Alisa Anton via Unsplash

I made a money mistake.  I know, I’m supposed to have my s#!% together, but have I told you how badly I want to crawl in a hole and hide every time I hear the word “investing?” No? Well, consider yourself informed.

To me, investing has always had a gambling aspect to it.  Because you can never truly predict what the market will do, there’s the potential that you could watch all your money slowly spiral down the drain. And for someone whose only casino experience rivaled that of your 80 year-old grandma (i.e. I spent $20 at the slots), that’s scary.

However, as intimidated as I am by investing, I also know that if I want to ever quit working (or better yet, retire early), then I need to pull my head out of the sand and tackle this demon. Even though I’d rather crawl back into that hole.  Or cross my fingers and hope it all turns out ok. Or anything else. 

My 401(k) was a slight mess, and by slight, I mean like the catastrophic state your bedroom is in after trying to figure out what to wear on a first date (you feel me). I had opted into one of those predetermined mix of fund options that supposedly matched my risk profile; however, after looking it over, it seemed like I was not only getting hit with fees out the wazoo but also not earning better returns to offset those fees.  It was a double whammy in the worst way possible.

So while I was home for Christmas this year, I sat down with my brother (who graduated with an MBA from the Investment Academy at the Kelly School of Business – I know, I’ve got the inside hookup) and went over how to reinvest my money so that it was working in the best way possible for me.  We cut down the number of funds I invested in, chose ones with lower fees, and essentially gave me a diversified portfolio without all of the bells and whistles most fund managers will try to sell you.  Great way to start the new year.

Now that I have my retirement fund back in order, I want to do the same for you. If you aren’t up to speed on what exactly a 401(k) is, read my post about it here.  For those of you already well aware, I’ve listed below the 5 biggest ways you are screwing up your 401(k) and how to correct them.  I mean, we all don’t want to work at our 9 to 5s forever, right?

NOT CONTRIBUTING UP TO THE MATCH

This is the sin above all money sins because you are essentially giving up FREE MONEY.  And if you aren’t taking it, you better have a good reason.  Like a medical emergency. 

By contributing up to your match, you are basically getting a 100% return on your money.  I don’t know about you, but if I can invest $1,000 dollars that will automatically give me another $1,000 risk-free, I’m going to do it.  And you should, too, so take full advantage of this if you have access to a 401(k) at your company.  If choose to forgo this advice, feel free to give yourself a swift kick to the butt for me.  Literally. Go kick yourself.

 Another reason to take advantage of the match? If you start investing early, compound interest works in your favor. More information can be found here >>>  Actually, Young People Should Invest in Their 401(k)s

Another reason to take advantage of the match? If you start investing early, compound interest works in your favor. More information can be found here >>> Actually, Young People Should Invest in Their 401(k)s

NOT DIVERSIFYING

First, let’s get this out of the way: diversification is good because it exposes you to less risk. There.  Let’s move on.

Some people choose to invest their entire 401(k) in one fund, and this is absolutely fine if you have additional investments outside of that which help to give you that diversity; however, if the only retirement fund you currently have is your 401(k), then investing in just one fund is a rookie mistake, and one you need to correct quickly.

Personally, I try to invest in the following 4 categories (one or two mutual funds in each), which give me enough diversification to not subject me to too much risk:  index (like the S&P 500), growth, international, and bonds.  You don’t necessarily have to follow my path, but make sure you are investing in funds across the market. [1]

CHOOSING HIGH FEE FUNDS

When diversifying your 401(k), make sure you are choosing funds with low fees.  For example, all of the funds I currently invest in within my 401(k) have expense ratios less than 1% (in fact, they’re less than 0.50%).  Otherwise, a lot of your money is going straight into the pocket of your 401(k) manager.  Index funds are notorious for having low fees, so start there.

BORROWING FROM YOUR 401(K)

Again, unless you are in medical emergency, you should never borrow money from your 401(k).  Doing this signifies you are living beyond your means, and if that’s the case, I’m also worried that you won’t be able to repay this loan, which means you’ll be paying ordinary income tax plus a 10% penalty on that loan amount.  So, a $1,000 loan that you don’t repay will cost you $350 (at an estimated 25% tax rate). Hi, no thank you.

When you contribute money to your 401(k), just consider it untouchable until retirement.  It’s better for you and all that traveling you expect to do after you say adios to your full-time J-O-B.

TRANSFERING AN OLD 401(K) TO A NEW ONE (OR CASHING IT OUT)

Did you know that if you cash out your 401(k) prior to age 59 ½ you will get charged a 10% penalty? Yeah, not so fun. Don’t do it.

So what do you do if you switch companies and need to move your 401(k)?  Well, if you’re the average Joe, you’ll probably just transfer it to the 401(k) your new employer provides.  Not the best move.  And we’re no average Joes, right, ladies?

Here’s the thing about 401(k)s: they are great because you can contribute to them with pre-tax dollars and potentially get a match from your employer.  They aren’t so great because you are extremely limited in what investments you can put your money towards.  Thus, when you get the opportunity to move your money away from your 401(k), you want to take it.

So where should you put all that money you’ve been racking up? If you don’t already have one, open a traditional IRA[2] with an online brokerage (think TD Ameritrade), and transfer your funds there.  You won’t get penalized if you follow the correct procedures (the online brokerage company or your old 401(k) can help you with this), and you’ll be able to invest in anything in the market.  And then drink champagne and do a happy dance.


Your 401(k) is an important aspect of your overall retirement fund, and I hope you take the time to make sure it’s working for you in the best way possible.  It’s what a #ladyboss would do ;)

Have any questions or comments about 401(k)s?  Feel free to comment below!

 

[1] Small disclaimer: Investing isn’t a “one size fits all” deal – there are many ways to be successful in the market, and this is just the way that best fits me and my needs.  Just diversify, ok?

[2] You could also transfer your funds into a Roth IRA; however, if you were contributing to a traditional 401(k), meaning you contributed pre-tax dollars, you will have to pay tax on that amount when you transfer.  However, your principal and earnings from there on out will all grow tax-free.

 Photo Credit: Jimmy Bay

Photo Credit: Jimmy Bay