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Biggest 401(k) Blunders

By Doug Fabian
President, Fabian Investment Resources
Host, The Doug Fabian Show

Here's my list of the biggest mistakes you can make with respect to your 401(k) plan: 

1. Non-Participation. More than 50 million employees are eligible to contribute to 401(k) plans, yet only 40 million do. That means 10 million, or 20%, have overlooked the quickest and easiest path to get rich in America.

It gets worse. Some surveys have determined that 1/3 of 401(k) participants simply put their money into cash accounts. The difference between putting $2000 a year for 25 years into a money market versus a stock fund is as much as $850,000. (Just compare 6% interest to 20% annualized compounded growth!) The lesson? Get into your 401(k). Get all the way in! 

2. Asset Allocation. A commonly cited fact about investing is that your asset mix accounts for 90% of your investment returns. In essence, the asset combination that you choose -- stocks, bonds, cash -- is more important than the actual investments.

Does this suggest that people should fill up on stocks, bonds and cash to be successful? 50/30/20? 60/35/15? Absolutely not! The asset mix with the biggest payoff in every major research study is 100% stocks, 0% bonds and 0% cash.

Break the bonds that limit your potential!

3. Not Maxing to the Match. The greatest 401(k) benefit a company offers to its workers is the matching; that is, you put in 7% of your salary and they'll pay 50 cents on every dollar. That's FREE money. That's free, no-strings-attached money.

Nevertheless, some people insist that they can only contribute 4% or 5% of their paycheck, neglecting to match the additional 2%. How big a difference is that 2% contribution and match over 25 years? A wage earner making $50k would be giving up $708,000. 

Where there's the will to be wealthy, there's a way. Always max to the match!

4. Rocking But Not Rolling. You participate. You put 100% into stock funds during bull market uptrends. You max to the company match. And now that you're making a career switch, you're planning to do all these things at the new job.

But what about the old 401(k)? Why not leave it where it's at... it's been performing well. Or how about rolling into the new employer's plan. 

In most cases, neither the old 401(k) or the new 401(k), is the best place for this money. The best option is rolling over your tax-deferred dollars into an IRA at a major discounter, like Schwab or Fidelity. Why? Because 401(k) plans have limited fund choices, whereas a discounter has thousands.

Take advantage!

5. Loaning Yourself Money. Surveys show that about 1/3 of 401(k) participants borrow against it. And many corporations describe these loans as a wonderful feature.

Nothing could be further from the truth. In reality, you'll probably need to make smaller contributions to your plan to afford the loan repayments.

You'll kill portfolio growth because of the interest you now have to pay. And you're going to be paying with after-tax, not pre-tax, dollars. Unless you're in financial dire straits, don't borrow against your future wealth. Don't borrow against your 401(k).

Doug Fabian is president of Fabian Premium Investment Resource and editor of the company's four subscription-based newsletter products. For more information on these services and the highly rated Fabian Plan, including how it can help you attain your goals of growth and income using today's best no-load mutual funds, visit the Fabian web site at http://www.fabian.com/.