There's one aspect of 401(k) plans that makes them really effective -- the automation aspect. Employer-sponsored 401(k)s are funded through payroll deductions. That takes human behavior out of the equation and helps savers stay on track.
When you have a long-term savings plan that you're actively funding, such as an IRA you must transfer money to month after month, you might fail to meet your savings goals when unexpected events or impulse purchases get in your way. With a 401(k) plan, you're committed to those contributions, and they're taken out of your paycheck before you even get a chance to spend that money elsewhere.
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But while it's possible to build up quite a large nest egg by funding a 401(k), you may be feeling less than happy about your plan's progress. If your 401(k) has been slow to grow, these could be some of the reasons why.
1. You're invested too conservatively
Many people invest their 401(k)s in target date funds because, frankly, that's an easy option. In fact, in many cases, a target date fund will be your plan's default option, so that if you don't even want to be bothered with picking funds, your money will just land there.
Target date funds are good for people who want to take a "set it and forget it" approach to retirement. But if you adopt that attitude and fall back on a target date fund, you might end up with sluggish growth, since these funds are known to err on the side of investing conservatively.
Plus, you may be looking at hefty fees with a target date fund. Those can eat away at your returns. So rather than settling for a target date fund, explore your 401(k) plan's options. You may want to land on a mix of low-fee index funds that invest in benchmarks like the S&P 500.
2. You're not getting all of your free money
Many employers that sponsor 401(k)s also match worker contributions to some degree. But if you're not putting in enough money to claim your full match, then a slower-growing 401(k) shouldn't necessarily come as a shock.
Remember, when you give up, say, a $1,000 match, you're not just down $1,000. You're down whatever amount that $1,000 could've grown into via savvy investments. So always make a point of contributing enough to your 401(k) to get your full match -- even if it means having to take on a side hustle to come up with the extra cash.
3. You're not saving your annual raises
It may not be realistic to increase your 401(k) contributions from one month to the next. But if you get a raise every year, you have a prime opportunity to build up your savings by banking all of it, or as much of it as you can afford to part with.
It's true that some people's expenses rise from one year to the next. So if you're in line for, say, a $3,000 raise, you may not be able to part with every last cent of it for 401(k) savings purposes. But if you need to withhold $50 a month for a rent increase, so be it. In that case, increase your contributions by $2,400 and be proud that you did.
Your 401(k) will, ideally, allow you to achieve the retirement you want. So if you're not happy with the progress you're making on the savings front, it's time to take action. That means choosing smart investments, snagging your full employer match, and doing your very best to make sure you're boosting your savings rate from one year to the next.
