The Top 5 401(k) Mistakes You Need To Avoid

Saving in your 401(k) can be an easy and painless way to build your retirement savings. But because it’s so easy and painless, it can also be easy to ignore for long periods of time, which often leads to mistakes. We’ll cover at least the top 5 mistakes people make in their 401(k)s.

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Transcript Of Today's Show:

Speaker 1: Welcome into another edition of Plan With The Tax Man, with Tony Mauro, certified financial planner, CPA and EA at Tax Doctor Inc, serving you here in the Iowa area. Of course, he's got clients all over. Thank you so much for hanging out on the podcast with us. As we're going to about today, the top five 401(k) mistakes that you need to avoid. We've got some good tips here for you to consume this go around on the podcast. Tony, welcome in my friend. How are you?

 

Tony Mauro: I'm good. How are you?

 

Speaker 1: Doing pretty good. Looking forward to having this conversation with you. We are into a new year. So amazingly enough. So thought this would be a good way to kind of kick things off because hey, the 401(k), it's a great financial vehicle. I mean it's very easy, it's painless, it's a fantastic tool to help build. And I think that's probably going to be the key word, Tony, help build retirement wealth or retirement savings, I should say. But because it's also so easy and painless, it also is easy to forget about it. That can lead us to mistakes. There's other probably ... there's easier ways, I think, to extract money than a 401(k). They have a few hoops sometimes that make it a little bit more complicated. So we're going to just talk about some of the mistakes to keep on the radar to hopefully avoid when dealing with a 401k. I don't want it to sound like we're bashing the 401k, because again I think it's a great vehicle.

 

Tony Mauro: It is. It's a great vehicle. It's probably for most, the most important retirement vehicle they're going to have.

 

Speaker 1: Yeah, yeah, absolutely. So, we don't want to beat it up, but we just want to highlight a few areas to pay attention to. Okay. So that's what we're going to do. So let's just jump right in. The first one is, just don't leave them behind. You often hear things like stray 401(k), just don't leave those behind. Because you give up control by leaving an old 401(k) at an old job.

 

Tony Mauro: You do. It's ironic because tonight I'm meeting with my sister-in-law, we're talking about this because her husband died a long time ago and so she's been a widow for a while, but she's getting ready to retire. But the company that she left it with is now been taken over by some other company and they're basically saying, get it out of here, or we're going to invest it in this new company's 401(k). And of course she doesn't know anything about the funds or anything. But it's this exact case of she's left it there in the old company for a long time. And the reason why you may not want to do that, I think a lot of times you don't want to do that is because like you were mentioning, if you get into a rollover IRA, you've got much more control, you've got much more options for your particular investments in it. And it's not under that little 10 and 12 funds that the company used to have and fees and everything else. But we see it a lot. I mean, people will ... I call them orphans. They bounce around so much, they get these little balances all over the place and they kind of forget about them.

 

Speaker 1: Yeah, no, and we do see that. And so you'll have to share the podcast with her after. Be like, "Hey, listen to this." Of course, you're going to talk to her anyway.

 

Tony Mauro: I don't have to tell her she was on.

 

Speaker 1: There you go. That's right.

 

Tony Mauro: I mentioned her.

 

Speaker 1: But yeah, it's very true. To your point, I mean typically there's not a lot of options in the 401(k). Of course you're no longer there to keep an eye on it. You're no longer putting money into it actively anyway. So it just makes more sense to get rid of that 401(k) and roll that over to an IRA where you do have more control, a bigger smorgasboard of options to go through. So that's the first one. Second one, and '22, we're now into the new year, but 2022 certainly taught us that failing to rebalance often enough could be problematic because '21, you were totally fine with things. Then if you didn't do any rebalancing going into '22, you might have paid for that last year.

 

Tony Mauro: That's right. And a lot of times people in 401(k)s at these bigger companies, there isn't an advisor in ... sometimes there is, they'll give you a little bit of help. But a lot of times they're not. You're just putting money in from your paychecks, probably not watching very close and all of a sudden, what you used to be invested in, because most people will pick more than one fund. It might be too heavily weighted based on, well number one, maybe your goals. But two is maybe that sector is all of a sudden out of favor and you may need to rebalance. But I suggest to people they should look at it once a year, rebalance one time a year. They kind of look at you look that odd look in their eyes and say, "Well, I don't even know what that is."

 

Speaker 1: And some of these, they will auto rebalance, right?

 

Tony Mauro: Yes. Some of them will. They will. If you've got a good one and you check the box, and then I would've recommend that too if they offer it, is to make sure it auto rebalances. Because then you don't have to worry about it while you're there. You still need to take a look and work with your advisor on if it still fits. But the key is, is you're still putting money in, it's just now you got to manage what's in there a little bit.

 

Speaker 1: Yeah, okay. Yeah, so definitely rebalancing is certainly a good idea, talking with your advisor just about doing that. Here's probably the biggest culprit in the reason why, Tony, which is number three on the list. Which is a target date fund. So it's the easy, low-hanging fruit that most of us wind up checking because we don't know a lot of things. So you go get the job, you've acquired the job, you're all happy, you're filling out the paperwork, it's HR day, they have you go online or whatever to do the 401(k) set up. And I don't know what to pick, say you pick the target date, oh, I'm going to retire in 2040. So I picked the 2040 fund, boom, now I've got me a customized plan. And that's the misnomer, you don't.

 

Tony Mauro: You really don't, no. And target date funds in them of themselves, I don't think are bad. But I think it's a misnomer to just, like you said, just pick that or have somebody tell you, "Well if you don't know, just pick the target day fund."

 

Speaker 1: It's better than nothing, but they have issues too.

 

Tony Mauro: They have issues. Yeah. And to me the biggest issue is I think if you really look inside the target day fund and how they're investing and as you get a little closer to retirement, to me, they get a little too conservative, I think.

 

Speaker 1: Okay, that's interesting. Yeah.

 

Tony Mauro: Yeah. I mean I just feel like they kind of do. If that's your investment makeup, then that's great. But if that's not you, then maybe the target fund ... I think it could be part of your 401(k). But I think you should have some other things besides that, for sure.

 

Speaker 1: Yeah, and typically they do have quite a bit of fees.

 

Tony Mauro: Yeah. They have fees is another one. You're right. Yeah. I missed the fees.

 

Speaker 1: They definitely have quite a bit on those ... oh sorry, go ahead.

 

Tony Mauro: Yeah. No, I was just going to say they do have quite a bit. That's another thing that nobody talks about that when you're going into the target date fund. But something to take a look at, especially if you can find it a lower net cost alternative.

 

Speaker 1: And it's kind of generalizing again, that customized portion is not really true. You think, well yeah, okay great. Because that's 2040, I'm going to retire in 2040. It's also a general wide smattering of people that are going to retire in 2040 versus just being customized to your specific needs. I find that interesting though that you said about getting conservative, because many will say the other thing with that because as they go down, as you get closer to the target date, they are supposed to get more conservative. I think the misnomer also is that people think that they go way, way down. But most of them don't drop below 50%.

 

Tony Mauro: No, they don't. They don't.

 

Speaker 1: So if you're thinking, okay, the risk, I'm at 70 and then I get closer and then it goes to 60 and then 50, 40. Most of them don't drop below 50% from the portfolio stance as far as risk versus safety. So yeah, I mean it's a nice simple idea. Again, we're not going to try to totally bash these. But there could be better options for you to do.

 

Tony Mauro: Yes, yes. True.

 

Speaker 1: And I think that's probably the end of the day. So you think about the 401(k), I think a lot of advisors, Tony, would say, "Look, definitely take advantage and get the match." Because that's what you're really after, is that free money. But then anything over and above that, maybe we should talk about something else that we have more control over.

 

Tony Mauro: Yeah. I know it's going to be one of my little bonus mistakes.

 

Speaker 1: Oh, okay. Yeah.

 

Tony Mauro: I guess what I see the most of is ... especially doing taxes, is I see people that they have 401(k)s at their work and they don't participate. I talk to them about it all time, I say, "That's the best deal on the street. You really need to throw some money in." If they start saying, "Well, I really can't afford." I said, "Then you've got a different problem we need to fix." And that's fixable.

 

Speaker 1: That's a great point. Yeah.

 

Tony Mauro: You've got to take advantage. But then the second one is they'll say, "Well yeah, I'm doing it." I'm putting in ... they'll just use a percent, "I'm putting in the max, I'm putting in 3%." And I said, "Well, that's not the maximum dollar amount, that's the maximum." I said, "That's for the match." And they said, "Oh yeah, yeah, that's for the match." I said, "And the match is great." But I always tell them, "Did you know you could put so much more in if you want to go past the match?" Because it's still tax deferred or if they're choosing the Roth option, there's all kinds of things. But I tell them, especially if you start doing some math with them, you're a little 3%, let's use a little future value calculator and figure out what that's going to be in 30 years. I show it to them and I say, "Well, is that going to be enough?"

 

Speaker 1: Or what's 6%? Yeah.

 

Tony Mauro: Yeah, then they start, "Well what's 6%?" I said, "Forget this percent, let's talk dollars."

 

Speaker 1: Oh okay.

 

Tony Mauro: And let's start getting some dollars in there and then we can have some fun with it. Then we just do that for tax clients just to show them. So even if they're not in a planning client, we could say, "You need to go talk to somebody." Or, "Hey, we're here for you, but this is the kind of stuff that we do."

 

Speaker 1: Yeah, no, those are great extra tips too. So thank you for pointing those out. Because the last two I had were a little bit ... they're not quite as ... well, the one is dramatic, I suppose. But this next one is just kind of not forgetting the fact that ultimately us, as the participant, we're not the client. So the plan administrator or the plan ... their client is your boss, is your employer. Whoever you're working for and getting the 401(k) from, that's really who their client is. So they're making decisions based on that relationship, more so than they are on us as the participant.

 

Tony Mauro: Well they are. And in most places, unless you have a really good HR, you're not getting the advice and help because the 401(k) itself is not going to help you. They'll defer to your employer, which is their client, like you said. The employer, a lot of times nowadays they don't want any liability either. They're saying, "Well, you need to talk to your financial advisor because we don't want to say anything that could get us into any kind of trouble." Then you're stuck with, well, if I don't have an advisor or-

 

Speaker 1: What do I do?

 

Tony Mauro: I just got to go out and do some research.

 

Speaker 1: And you're [inaudible 00:10:42]-

 

Tony Mauro: Try to figure this out.

 

Speaker 1: Yeah, exactly. So just keeping that one in mind. That's a little lesser mistake. But still something that sometimes people overlook. Then of course, we talk a little about fees, I won't beat it up too much. But just assuming that the fees and costs are minimal, especially when we don't see them. That's kind of the little trick too, is that unfortunately ... I mean, first of all, who reads the prospectus on a regular basis anyway? Most people don't. And some of them, they just don't have to disclose.

 

Tony Mauro: They don't. And yeah, people will ... from the 401(k)s that we have some people in, they'll call and say, "I got this prospectus, what does it say?" I always tell them, "Read it over, read it from cover to cover tonight, let me know." Most of them would rather set themselves on fire probably than to read through that.

 

Speaker 1: I made it through two paragraphs and they passed out.

 

Tony Mauro: Yeah, I'm out. But it's buried in there and it's all disclosed. Like you say, most people don't read that. They count on us to tell them that. We don't beat the fees up too much, but we like to let them know, here's what this is and here's how it's taken from you. Because they don't just send you a bill and have you pay it like your utility bill. So that's why it's kind of invisible, but it's still taken out [inaudible 00:11:52]-

 

Speaker 1: But it's worthwhile to find out how it's impacting your overall strategy. For sure.

 

Tony Mauro: It is. For sure.

 

Speaker 1: And finding out whether there's better options, if there are better things to do. That's really where it kind of comes back to the conversation and especially some of those extra ones that Tony just shared is finding out what's the best way to do. Definitely getting the free money is paramount, you need to do that. But then over and above that, have a conversation. Maybe it's worth doing six or 10% to Tony's point. Or maybe it's worth doing an IRA, getting the match and adding some money over there or a Roth. So just lots of ways to think about it when it comes to just 401(k), some little mistakes that can help us save some money. Okay. Anything else? Did we miss anything or are we good? I think we get it.

 

Tony Mauro: Well, we could talk about this topic for a long time, but those are the major ones. I think with everybody's New Year, New Year's resolutions, I'd say to everybody, one of them, make sure you take a look at your plan, make it a part of your life to say, this year I'm going to review the plan or I'm going to get a plan.

 

Speaker 1: There you go.

 

Tony Mauro: And get something started. Because you're doing it with everything else. The first part of the year, everybody does it. But at the end of the day, unfortunately, especially when we're talking about 401(k)s, nobody's going to do it for you now. The days defined benefit plans are gone for the most part, and it's all up to us.

 

Speaker 1: It is so easy to set it and forget it, as I kind of led off with. Instead of doing a resolution, make it a goal, folks. Because resolutions get thrown out the window pretty easy. So my goal is to get my finances straight, my goal is to shore up my 401(k) mistakes, whatever that might look like. Put that on your calendar for the beginning of this year. And that'll do it for the podcast. So thanks for hanging out with us. We certainly appreciate it. Hopefully you found this useful. And of course, if you need some help, reach out to Tony and his team at yourplanningpros.com. That's yourplanningpros.com. Again, Tony is a CPA, CFP, and an EA of 27 plus years helping folks get to and through retirement. Des Moines Professional Alternative at Tax Doctor inc is where you can find him. And of course, that's online at yourplanningpros.com. Don't forget to subscribe on Apple, Google, and Spotify, all that good jazz. You can find us on all those major platforms. Tony, thanks for hanging out and shedding some light on this topic with us.

 

Tony Mauro: All right, thank you. We'll see you next time.

 

Speaker 1: Yep. We'll catch you next time right here on Plan with the Tax Man with Tony Mauro.

 

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