Avoid These 3 Biggest Mistakes You Can Make in the First Year You Open a 401(k)

Although not everyone has access to a 401(k) plan, data from the U.S. Census finds that among workers aged 15 to 64, about 35% had access to a 401(k) or similar account, like a 403(b), in 2020. If you're opening your first 401(k), you should know that you're doing a great thing for your future self by making an effort to build retirement savings.

But it's also important to do a good job of managing your 401(k). So with that in mind, here are some mistakes you'll want to avoid the first year you start saving and investing in that account.

1. Not snagging your employer match

An employer 401(k) match is basically free money for your retirement that you can snag by contributing funds out of your own paycheck. It's important to not only find out what your full employer match entails, but push yourself to contribute enough to claim that match in full. Pass it up, and you're leaving free money on the table.

Remember, the money your employer puts into your 401(k) is money you can invest. So let's say you're 22 years old and get a $2,500 employer match this year. Over the past 50 years, the stock market has averaged an annual 10% return. If we apply that return to your 401(k), by age 67, that single $2,500 contribution from your employer could be worth over $182,000.

If it's your first year opening a 401(k), it may be your first year working, which means your salary may not be the most generous. If there's not a lot of room after paying your essential bills to fund your 401(k), try picking up a side hustle to make it possible to contribute enough to snag your full employer match.

2. Letting your money sit in cash

We just saw that a single $2,500 contribution to a 401(k) could grow to over $182,000 if invested. Don't just leave your 401(k) contributions in cash, such as if your plan offers a money market account. Your money might grow at a snail's pace compared to what investing in the stock market might do for you.

Let's say your money market yields only 2.00%. On a $2,500 contribution, 45 years later, you'll have about $6,100. And sure, it's more than what you started with, but it's a negligible sum compared to $182,000.

To be clear, it's a good idea to keep your emergency fund in cash. But that's not a good idea for your nest egg.

3. Investing in a target date fund

You'll very commonly find target date funds as an investment choice in a 401(k). In fact, with some 401(k)s, your money will automatically land in a target date fund if you don't select alternate investments, like mutual funds or index funds.

Target date funds, on the one hand, make investing easy. You simply identify your projected year of retirement and your fund does all of the work for you.

During the earlier part of your savings window, it will invest your money more aggressively. As retirement nears, you'll be shifted into more conservative investments to minimize your risk of losses.

Put bluntly, a target date fund is a good option for taking the easy way out when it comes to retirement investing. And look, that's not an awful thing per se. If you're someone who truly doesn't have the head for researching investments and is risk averse, then it may be a suitable choice for you.

But if you stick to a target date fund, you may find that your 401(k)'s returns aren't as strong as they could've been with another mix of funds. Plus, target date funds tend to charge costly fees that could eat away at your returns over time. So you may want to favor index and mutual funds instead.

If you're going to work hard to save in a 401(k), your money should work for you. Make a point to snag every free dollar your employer will give you, steer clear of cash, and choose your investments carefully.