Not everyone has access to a 401(k) plan through a job. But if you have the option to save in one of these accounts, it pays to do so.
The nice thing about 401(k) plans is that contributions are automated. Because they're taken as payroll deductions, it's fairly easy to stay on track with your savings efforts. With an IRA that you have to actively fund yourself each month, you risk overspending and not being able to move money over at all.
But while saving in a 401(k) could eventually set you up for a worry-free retirement, the wrong decisions on your part could stomp all over that goal. Here are a few seemingly innocent moves you might be making in your 401(k) that result in less savings at the end of the day.
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1. Saving just enough to claim your full employer match
Many employers that offer 401(k)s also match worker contributions to some degree. You'll often hear that if you can't max out your 401(k), which is a really difficult thing to do, then you should at least contribute enough to snag your employer match in full.
But that doesn't mean you shouldn't save beyond that point. And if you limit the amount of money that goes into your 401(k), you might end up with less savings than you'd like.
So let's say your employer will match up to $3,000 in annual 401(k) contributions. You may not be in a position to sock away $20,000 a year for retirement. But if you can afford $4,000 or $5,000, set that amount aside rather than limit yourself to the $3,000 your employer will match.
2. Letting your money default to a target date fund
If you don't choose investments for your 401(k), your money will often land in a target date fund. These funds work by adjusting your risk profile as the milestone you're saving for -- in this case, retirement -- draws near.
A target date fund might seem like a good place for your money. After all, you won't really have to spend time thinking about how your 401(k) is invested because that fund will adjust your asset allocation appropriately as you age.
But one thing you should know about target date funds is that they tend to err on the side of conservative investing. And investing too conservatively over a long period of time could stunt your 401(k)'s growth.
Also, the fees associated with target date funds can be notoriously high. Those could eat away at your returns over time, leaving you with less money at the end of your career.
3. Loading up on expensive actively managed mutual funds
You may decide that you're willing to take a more hands-on approach to your 401(k) by investing in actively managed mutual funds. But like target date funds, the fees associated with mutual funds can be high. And those could erode your returns over many years.
Before you settle on mutual funds for your 401(k), see what passively managed index funds are available. And then, compare their performance to their actively managed counterparts. You may find that the index funds offered in your 401(k) have similar historical returns to those actively managed mutual funds, only with considerably lower fees.
Funding a 401(k) is a great way to set yourself up for a secure retirement. But aim to avoid these mistakes so you don't wind up with a savings shortfall on your hands.
