7 401(k) Truths People Often Discover After It’s Too Late

Investing in a 401(k) seems pretty straightforward while you're working. You make contributions every paycheck, choose your funds, and hopefully increase your contributions over time. Mostly, though, your 401(k) grows in the background while you take care of your work and other responsibilities.

As most people approach retirement, however, they often take the time to carefully review their 401(k) retirement plans and discover some uncomfortable truths. Here are some examples to help you stay aware and take action before it's too late.

401(k) fees can cut into returns

Most people don't consider 401(k) fees because they are often very small percentages, such as 1%. However, even small fees can be a significant expense when you consider what 1% equals when compounded over a 30-year career.

If workers choose funds with higher fees, that's less money that they get to keep in their accounts, which means it's less money that can compound and grow over time. High fees, therefore, can equal tens of thousands of dollars less in investment returns over a career.

There are required minimum distributions

A required minimum distribution (RMD) means that once you reach a certain age, you have to take a withdrawal from your 401(k). If you don't, there are penalties. Currently, the required minimum age is 73 due to the new Secure Act 2.0 legislation. It will be raised to 75 in 2033.

Some people don't realize they have to take money out of their 401(k)s, so this may come as a surprise. It can also impact income taxes, especially if you're trying to balance 401(k) withdrawals with Social Security income or pension income.

401(k) loans limit returns

People choose to take out 401(k) loans for a variety of reasons, including emergencies. These loans may feel different than high-interest credit card debt or personal loans because you're borrowing money from yourself.

However, the hidden cost of a 401(k) loan has the biggest impact. That is once you withdraw money from your account, it's no longer working hard for you and earning interest. Even if you pay yourself back in time, you are missing out on market gains. Additionally, if you change jobs or get laid off, you're required to pay back your 401(k) loan within a few months. If you're unable to, it may count as an early withdrawal.

Early withdrawals come with fees

If you decide to withdraw money from your 401(k) before you turn age 59.5, you'll have to pay a 10% penalty. Because of that, it might not be worthwhile to withdraw funds because you might not receive as much as you hoped. Additionally, when you withdraw money from your 401(k) early, not only is there a fee, but you also lose out on potential investment returns.

Catch-up contributions change

Sometimes, people don't realize that catch-up contributions rules have changed. A catch-up contribution is a perk that people get when they turn age 50. It allows them to add extra money to their 401(k)s in an effort to help them invest more before retiring.

In 2026, a new catch-up contribution rule applies to those who earn over $150,000 a year. Starting this year, high earners must make their catch-up contributions as Roth contributions. This can impact tax planning, especially for those who were accustomed to using catch-up contributions to reduce their taxable income.

Employer stock can be risky

Many employers offer the option to buy company stock or sell it at a discount as a perk. However, some people don't diversify their investments and end up buying too much company stock. This can be risky because if your employer declares bankruptcy, your stock will drop in value. Schwab recommends keeping no more than 10% to 20% of a 401(k) portfolio in employer stock.

401(k)s might not be enough

A 401(k) is one of the most popular retirement tools that Americans have. However, it was never meant to be the only source of retirement income. Employees should aim to have multiple streams of income in retirement, such as 401(k) income, IRA income, and Social Security income. Data shows that one out of eight retirees plans to return to work because they can't afford retirement, which is why it's so important to think beyond a 401(k) when making a retirement plan.

Bottom line

Taking time to understand how 401(k)s work, the fees involved, and the best withdrawal strategy can help you have a stress-free retirement. Unfortunately, many people discover too late that some of their 401(k) choices have cost them thousands of dollars over time. However, for those who are still working, there is time to get professional advice, create a retirement plan, and ensure you fully understand all the 401(k) rules that can affect your ability to retire successfully.