Saving for Retirement in a 401(k)? 7 Costly Mistakes You Could Be Making

If you're actively saving in a 401(k) retirement plan, making an unintentional financial mistake could put your investments in jeopardy. Many people don't realize that small oversights can quietly shrink your nest egg over time.

Here are seven of the most common and costly 401(k) mistakes that workers need to be aware of today. Fortunately, for most of them, you can course-correct quickly if you're making them.

Not contributing enough to capture the full employer match

According to a recent survey, 28% of workers over 45 think they'll have to delay retirement because they don't have enough saved. Taking advantage of an employer match is one of the best ways to ensure that you build a large enough nest egg to retire on time.

An employer match is essentially free money that workers can get for contributing to their 401(k)s. Each employer has their own rules, match policies, and investing schedule. Employees should take the time to familiarize themselves with their employer's plan so they know how much they must contribute to receive the full match and understand any vesting requirements.

Ignoring high fund fees and expense ratios

401(k) fees can slowly erode your nest egg, and you might not even realize it. The details about your 401(k) fees may be in the fine print of your retirement plan paperwork. Even small fees, like a 1% annual fee, can compound over time.

Completing a review of your retirement account can show you which funds have high fees and expense ratios. If possible, you can choose assets with much lower fees. If you're not sure which ones to choose, consult a financial advisor who can help you find the best fit for you.

Choosing a target-date fund without checking fees or its glide path

Many people choose investments without revisiting them. For example, many workers choose a target-date fund with the best intentions. After all, target-date funds are designed to become more conservative the closer you get to retirement.

However, many people choose target-date funds without reviewing their fees or glide paths. Again, taking the time to carefully review each asset in your 401(k) portfolio can help prevent unnecessary fees that may erode your 401(k) balance over time.

Cashing out your 401(k) balance when switching jobs instead of rolling it into an IRA

Another mistake people make is cashing out their 401(k) balances when switching jobs. For workers under 59 1/2, cashing out their 401(k) comes with a 10% penalty. Many people make this mistake because switching jobs can be hectic, and they may be unsure of their options. Rolling over a 401(k) into an IRA or your new employer's 401(k) directly helps avoid these unnecessary penalties.

Taking early withdrawals or a 401(k) loan

Just over 20% of people took an early or hardship withdrawal from their 401(k)s, and 31% have taken a loan, according to the Transamerica Retirement Survey.

Taking out a 401(k) withdrawal or loan can have a detrimental impact on your 401(k) because that money cannot grow and compound in the market for you once you take it out. Additionally, if you do not repay your 401(k) loan on time, it can be treated as an early withdrawal, which carries a 10% penalty if you're under age 59 1/2.

Never raising your contribution rate, even if you get a raise

Increasing your contribution rate each year or whenever you get a raise can help your 401(k) account grow. Even a 1% increase each year can make a big impact over time. However, if you never raise your contribution rate, you run the risk of not having a large enough nest egg to retire on time.

Not taking advantage of catch-up contributions after 50

Once you turn 50, you have the opportunity to make catch-up contributions. Those who are 50 or older can contribute an extra $8,000 per year to a 401(k) in addition to the maximum of $24,500 per year. This is many people's last opportunity to top up their retirement accounts before they stop working.

Additionally, many people don't realize they may be able to contribute to a Roth 401(k) instead, which can lead to significant tax savings in retirement.

Bottom line

To be fully prepared for retirement, it's important to make the right moves financially. Making some of the mistakes above could slowly chip away at your savings, but fortunately, most of them are fixable if you catch them early enough. If you have any questions about your retirement plan, you can always make an appointment with your HR department or with a financial planner.

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