Diligently saving in your 401(k) is one of the best things you can do for retirement. But if you're just tossing money in there without understanding the benefits and drawbacks of your account, you might be missing out on opportunities to grow your savings even faster. Take some time to review your 401(k) plan now and make sure you're not making these three common mistakes.
1. Paying too much in fees
Keeping your investment fees to a minimum helps you grow your savings more quickly. Unfortunately, you can't avoid fees entirely when you invest. But you can take steps to minimize your costs.
The most important thing you can do is find out what investment fees you're paying and look for more affordable options. If you're investing in a mutual fund or exchange-traded fund (ETF), your fees will most likely come in the form of an expense ratio. This is an annual fee, written as a percentage of your assets. A 1% expense ratio means that every year, you pay 1% of all the money you have invested in the fund.
You don't want to pay more than 1% of your assets if you can avoid it. If you already are, check to see what other investments are available to you. And if nothing seems like a great fit, talk to your employer to see if it will add some more low-cost options.
2. Not reviewing the fine print of your 401(k) match
Not all 401(k)s offer employer matches, but if yours does, it's crucial that you understand how its matching formula works and claim your full match whenever possible. The easiest way to get started is to talk to your company's HR department or 401(k) plan administrator to learn how its matching formula works.
Most companies will either give you $1 or $0.50 for every dollar you contribute to your 401(k), up to a certain percentage of your income. As your salary rises, so does your potential match.
Your employer can change or remove its 401(k) match at any time, so make sure you stay up to date on these changes as well. You'll likely receive some kind of notice before the company alters your 401(k) match.
Another thing you want to pay attention to, particularly if you haven't been with your employer long, is the 401(k)'s vesting schedule. This determines how long you must work for the company before you're allowed to keep your 401(k) match if you quit. If you quit before you're fully vested, you could lose some or all of your match. That's why you should try to stick it out with the company until you're fully vested, whenever possible.
3. Not reviewing your monthly contribution amount
When you first began contributing to your 401(k), you decided how much money you wanted to set aside every month. But if you've been with the company for a while now, your original contribution amount may no longer suit you. If you've gotten a raise, you may want to set aside more money every month to grow your savings faster.
This is also a good idea if you weren't able to save as much as you would've liked to in prior years. Aim to gradually increase your contributions by 1% of your salary every year until you reach your target savings amount.
You should be able to log in to your online account and update your 401(k) contributions there. If you're unable to figure out how to do this, talk to your HR department or 401(k) plan administrator.
Make it a habit to review your 401(k) contributions and investment options every year. Go through the suggestions outlined here again and look for additional opportunities to optimize your 401(k)'s growth. It should only take you a few minutes, and it will likely pay huge dividends later.