Many people rely on their 401(k) account as a safe, trustworthy ticket to a stable retirement. Unfortunately, several common mistakes could sabotage your 401(k)'s performance over the long haul.
Eggs, basket -- you know the drill
For starters, many folks' 401(k) accounts mostly or entirely contain shares of their employers' stock. It can be dangerous to hold too much in any one stock, especially if it belongs to the company you work for. You already rely on your employer for your income, so you're adding even more eggs to that basket this way.
Target-date funds have become one of the most popular 401(k) investments among younger workers and new hires. These funds, each tied to a particular retirement year, aim to relieve you of the responsibility of shifting your investments from stocks to bonds as you age. Each tends to make its holdings more conservative over the years; younger investors with more time before retirement are best served by faster-growing stocks, while older investors tend to need more bonds to protect their principal and provide income.
However, target-date funds make up about a quarter of twentysomethings' accounts. If young investors devote only a small portion of their holdings to these funds, and a big chunk of the rest to bond funds, they're sandbagging their chances for the best growth over the long haul. Younger investors with a higher tolerance for risk should make sure that most of their 401(k) holdings, whatever form they take, are invested in stocks.
"Balanced" funds can present another asset-allocation problem for many workers. These stable-sounding investments sound tempting for younger investors, among whom they're statistically most popular. But again, these funds devote a far too significant portion of their holdings toward bonds, especially for investors with 30 or 40 years to go until retirement. Balanced funds are much better suited for older investors who need the additional stability.
Stock (or "equity") funds are rightfully a popular choice for many investors. The percentage of overall 401(k) assets in stock funds now stands at about 41%, up from 37% in 2008, suggesting that investors didn't flee from stocks too much after 2008's stock-market implosion. But for an average worker with 20 or more years before retirement, having just 41% of assets in stocks is probably too conservative. An 80% or 90% allocation is likely to grow your money more effectively, without too much long-term peril.
Allocation aside, many funds available through 401(k)s charge excessive annual fees. If you're aiming to earn 8% per year, but find you're surrendering 1.5% or 2% of those earnings in fees, you may want to ask your plan administrator to offer lower-cost options. The average 401(k) charges 0.93% annually, but 10% of funds charge 1.72% or more.
If you just can't get good offerings in your 401(k), don't forget that you still have other options. You can still invest in a low-cost index fund through a traditional or Roth IRA, or even a regular brokerage account. Among other discount fund shops, Vanguard offers many such funds with annual fees below 0.20%.
Don't leave your 401(k) account's future to chance. You can't control everything, but it's within your power to arrange your account to yield the best returns down the road.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.