Five Mistakes to Avoid in Your 401(k)

While nearly a third of workers participate in 401(k) plans, some common mistakes and oversights limit the rewards they ultimately reap.

Many participants choose the wrong funds, fail to monitor investments or simply forget about a plan when they change jobs frequently, says Lisa Van Fleet, a partner at St. Louis-based Bryan Cave LLP who specializes in employee benefits and compensation. She suggests that employees contribute as much as they can for as long as they can and stay informed about their investments' performance and how legislation and tax rules apply.

"Arrive early, push your contributions to the limits, pay attention to the game, and, if possible, play into overtime," says Van Fleet.

Whether participants are pressed for time, confused by financial mumbo-jumbo or plain lazy, there are some simple guidelines to maximize returns.

1. Contribute more

Participants who don't contribute enough to receive matching funds from their employer are "leaving money on the table," says Van Fleet. Still others don't take advantage of special "catch-up" contributions that allow those who are 50 years old or over to contribute more on a tax-free basis than their younger counterparts.

The maximum annual 401(k) deferral allowed in 2008 is $15,500 for those under 50. It's $20,500 for those age 50 or older. If an employer provides 3% in matching funds, a $10,000 contribution by the participant will result in a $20,150 overall contribution.

2. Strategize, then track performance

Formulate an investment plan based on your age, risk-appetite and market outlook. Van Fleet suggests using life-cycle funds, which shuffle the investment mix to reduce risk (and, usually, returns) as the participant ages. Many participants have been automatically enrolled into this type of 401(k) because an increasing number of employers are using it as the default option.

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