10/13/2010 6:00 PM ET|
5 common 401k mistakes (and fixes)
Savers who stuck with their 401k's through the downturn are seeing their nest eggs grow again. But further adjustments can be made to keep retirements on track.
The recent rally in stocks -- last month was the best September since 1939 -- has helped beleaguered 401k account holders.
Investors who kept contributing to their 401k plans and stayed with a mix of stocks and bonds have seen a decent rebound from the lows of early 2009. Vanguard Group says the average balance of its accounts was about $73,300 as of Sept. 30, up from about $53,000 on March 31, 2009.
Even better, some of the company matches that were halted have been restored, and some of the worst practices of the past decade -- investing heavily in company stock, anyone? -- have abated. Participation rates have been steady.
But many investors may be down from the peak in 2007. And defined-contribution plans have averaged only about a 2% annual return since 2000, according to the Profit Sharing/401k Council of America, an association of plan sponsors. That means a lot of us are far short of where we had hoped to be.
Here are five common 401k mistakes and adjustments you can make to keep your retirement plans on track:
Mistake No. 1: Thinking the most important decision is how you invest your money.
Many of us agonize over selecting just the right funds or whether to put 50% or 65% into stocks.
Sure, asset allocation can have an impact on your bottom line, though it is partly a game of luck, depending on whether you catch a rally in one sector or another. Your priority, though, should be determining how much you need to save -- and figuring out how to make that happen.
Unfortunately, compared with debating mutual funds, savings "is so unsexy that nobody wants to talk about it," says Mike Alfred, the chief executive of Brightscope, which rates 401k plans.
The average participant saves 7% to 8% of pay, but many retirement-plan advisers recommend you aim for 10% or more, before including your employer match. Under Internal Revenue Service rules, you can contribute as much as $16,500 to your 401k this year, plus an additional $5,500 if you are 50 or older.
Mistake No. 2: Investing only enough to get the company match.
You don't want to leave money on the table, so you definitely want to collect whatever the company is offering. But in reality, it may not be that great a deal. Some companies eliminated the match in the last downturn, and many haven't restored it.
Much more common -- and much less discussed -- is that many companies make that match hard to collect. Matches take up to six years to vest at 60% of the companies surveyed by the Profit Sharing/401k Council and half of those surveyed by Hewitt Associates, a human-resources consulting company that recently became Aon Hewitt, a unit of Aon (AON, news). In some cases, you may not receive any of the match for as long as three years, or you may get only a fraction of the match each year for six years.
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