This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

5 Common Mistakes 401(k) Investors Make

NEW YORK (MainStreet) — Is the best way to diversify a 401(k) simply to invest a small amount in every single option in the plan. That may seem to make sense, but it's a common misconception that many investors share. In fact, nearly three-quarters (74%) of 401(k) participants believe buying a bit of every investment offered is the right thing to do, according to a survey by MFS Investment Management.

However, many of the choices offered in a 401(k) investment menu can be redundant. By investing in a "little bit of everything," you could be duplicating your holdings rather than diversifying them. It's one of the five most frequent mistakes 401(k) investors make.

"Often retirement plans leave too many decisions up to participants, many of whom are ill-equipped to make well-informed decisions," says Ravi Venkataraman, global head of consultant relations at MFS. "Plan sponsors have a number of tools at their disposal that can help participants better invest for retirement. Creating simplified investment menus, implementing auto-enrollment and auto-escalation contribution plans, and offering professionally managed, diversified investment options will give participants the greatest chance of successfully investing for retirement."

In other words, if your 401(k) investment menu seems too complicated, get help – and complain.

Another frequent error that almost half of the participants surveyed (46%) are prone to make: tapping retirement savings for other financial needs -- like paying off debt or saving for college. Loans are an early distribution that can ultimately trigger taxes and penalties, as well as exclude funds from the potential for growth.

Other common misconceptions that can sink your 401(k) savings include:

  • Nearly a quarter (23%) of plan participants surveyed thought that there is no additional benefit to contributing more than what is necessary to receive the employer matching contribution. That can limit your deferrals to single digits, while most financial experts say we should save 10% to 15% for life after work.
  • Just 18% of participants believe that investing in target-date funds is the ideal way to diversify a 401(k) account. In fact, investing in just one diversified fund-of-funds like target-date or target-risk funds can be an excellent strategy.
  • Nearly two-thirds (65%) of 401(k) investors believe index funds are safer than the overall stock market. And almost half (49%) thought index funds have better returns than the stock market. Wrong and wrong.

"Solving the retirement equation is within reach — it comes down to making steady and consistent contributions, investing in an age appropriate and well-diversified portfolio, refraining from taking premature withdrawals and maintaining a long term view," Venkataraman says.

--Written by Hal M. Bundrick for MainStreet

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AAPL $126.00 -0.35%
FB $87.55 0.30%
GOOG $522.86 -0.10%
TSLA $279.72 -0.11%
YHOO $38.61 -1.96%

Markets

DOW 17,683.58 -46.53 -0.26%
S&P 500 2,068.76 -8.02 -0.39%
NASDAQ 4,991.94 -17.2740 -0.34%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs