I can ask a handful of my friends about their 401(k)s, and likely end up concluding that most of their accounts could use some improvement. But that's a small sample. So let me rely instead on numbers from the Employee Benefit Research Institute and the Investment Company Institute, which looked at nearly 22 million participants in more than 56,000 employer-sponsored 401(k) plans. (Twenty-two million is a somewhat larger sample than all of my friends put together.)

Here are some of their findings: The average balance, as of the end of 2007, was $65,454, and the median was $18,942. Fully 51% had a balance of $20,000 or less. Some 39% of participants had a balance of less than $10,000. And since these numbers are as of the end of 2007, we can safely assume that participants now have balances that are considerably lower.

The report led me to notice several common mistakes that most of us make with our 401(k)s.

1. Not saving enough
Those first two balances above are very telling. Since the median represents the midpoint of all accounts, if they were placed side-by-side in a line, having such a low midpoint relative to the average suggests that there's a small number of folks with very high balances skewing the average upward. But half or more of all participants seem to have less than $19,000 in their accounts.

Think about that. Imagine you're 45 years old, with $15,000 in your account. Let's also imagine that it grows at the market's historic average annual return of 10% for 20 years, until your hoped-for retirement at 65. It will grow to just over $100,000. Now, how well do you think you can live off that? Sure, you could augment it by continually adding to it during the 20 years, but let's face it -- if you're 45 and have accumulated just $15,000, you're not the most aggressive saver. You'll need to change your ways, and fast.

Now, let's imagine that you managed to save twice as much by retirement: $200,000. It might sound like a lot, but as I've learned in our Rule Your Retirement newsletter, to make that nest egg last, you should plan conservatively and withdraw about 4% of it per year in retirement. A 4% chunk of $200,000 is $8,000, or roughly $667 per month. Will that be enough to live on in 2029? I didn't think so.

So, clearly, too many of us are not socking away enough for retirement. Check out how big your nest egg should be at retirement, to support various 4% income levels:

Nest Egg at Retirement

4% Withdrawal

Per Month
















2. Not saving in the right way
Another big problem that many 401(k) investors have is parking their money in suboptimal places. Here is some of the study's data regarding the asset allocation of participants in their 20s:

Investment Type

Percentage of Account

Equity funds


Lifecycle funds


Balanced funds


Bond funds


Money market funds


GICs/stable value funds


Company stock


Source: Employee Benefit Research Institute and the Investment Company Institute.
GICs = guaranteed investment contracts. 

What's wrong, you ask? Well, according to research from professor Jeremy Siegel, stocks outperformed bonds 74% of the time over all five-year periods between 1871 and 2001. Over all 10-year periods in the same span, that figure rises to 82%. Meanwhile, stocks outperformed bonds 95% of the time over all 20-year periods, and 99% of the time over all 30-year periods.

If you're in your 20s, you may well have 40 years for much of your money to grow. Stocks would seem to be the best place, yet 7% of assets are in bonds in the above chart, 4% are in money market funds, and 6% are in guaranteed investment contracts, which also aren't fast growers. On top of that, while balanced funds by definition include a healthy portion of bonds, lifecycle funds will also park some assets in bonds.

Those in their 50s also stand a good chance of having 10 to 20 or more years for their money to grow, yet they only had 46% of their assets in equity funds. They had 11.5% in company stock, which can be risky, even if you have great confidence in your company's stock. (Many Enron employees had lots of confidence, way back when.)

3. Not spending enough time on your investments
Many of us have not sufficiently thought through how we're using our 401(k)s. Simply put, we're not making the most of them. When you invest your 401(k) in stocks, look for broad-market index funds, or active funds with low fees. An S&P 500 index fund, for example, will instantly plunk you into 500 of America's biggest companies, including blue chips Boeing (NYSE:BA), Caterpillar (NYSE:CAT), and Cisco Systems (NASDAQ:CSCO).

With an index fund, though, you're simply betting along with the market. If you want to aim higher, spend the time to research and study managed funds to see if they're right for you. To start off, you'll want to look for these key points:

  • No load fees.
  • Reasonable expense ratio.
  • Manager with long tenure and admirable track record.

You might find that you can invest in a fund such as Fidelity's Contrafund (FCNTX), for example, which sports no load and a reasonable annual fee, has outperformed almost all its peers over the past decade under the guiding hand of one manager, and whose top holdings recently included Coca-Cola (NYSE:KO), MasterCard (NYSE:MA), and Nike (NYSE:NKE). The key point with funds is that high fees can kill your returns.

Of course, your 401(k) should be only part of (not all of) your overall saving and investing plan. To boost your ultimate net worth even more, save and invest elsewhere: for example, a Roth IRA, and even in your regular brokerage account. In my investing, I supplement mutual funds with individual stock picks in a normal brokerage account -- because smaller positions in individual stocks give you the opportunity to turbocharge your portfolio's return. Plenty of well-known companies have posted impressive long-term average annual returns, such as Best Buy (NYSE:BBY), which has averaged an amazing 28% per year over the past 20 years.

4. Cashing out
Believe it or not, there are even more things you might do wrong with your 401(k). For one thing, you might cash it all out when you change jobs. That's not smart, even if it has just a small balance. Why? Because investors face a 10% early withdrawal penalty if they cash out and are younger than 59 1/2. Employers, too, have to hold back 20% of the balance for the tax man. And if the penalties weren't bad enough, remember that with compound interest on your side, even a small balance can still grow into a useful sum in the future.

These are four of the ways you could be screwing up your retirement. There are more, to be sure. So learn as much as you can about retirement investing mistakes -- and then avoid those blunders.

We'd love to help you get your 401(k) and the rest of your retirement plan in order. I encourage you to check out The Motley Fool's Rule Your Retirement newsletter service. Click here to try it for free for a whole 30 days, with no obligation. Doing so will give you access to all past issues, featuring lots of concise, easy-to-digest, practical advice.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Best Buy and Coca-Cola are Motley Fool Inside Value recommendations. Best Buy is also a Motley Fool Stock Advisor selection. The Fool owns shares of Best Buy. The Motley Fool is Fools writing for Fools.