6 Important 401(k) Mistakes to Avoid | Human Interest
6 Important 401(k) Mistakes to Avoid
401(k) mistakes are plentiful and painful. Read on to uncover 6 potential 401(k) pitfalls and find out how to avoid them.
401(k) Mistake #1: Choosing Investments Based On Past Returns
When choosing mutual funds in which to invest, a common method is to check out the 1 year, 5 year, and 10 year average annual returns. However, research shows that funds that outperformed for one or several years often do not continue to outperform. Here's a look at the best performing large-company stock funds:
Large-Company Stock Funds with the best 1-year performance records:
| Fund Name | Symbol | 1-Year return | 3-Year return | 5-Year return | 10-Year return | Max. Sales Charge | Expense Ratio |
|---|---|---|---|---|---|---|---|
| Federated Strategic Value-Dividend A | SVAAC | 11.39% | 11.41% | 12.02% | 6.66% | 5.50% | 1.05% |
| Integrity Dividend Harvest Fund Class A Shares | IDIVX | 10.85% | 11.08% | —— | —— | 5.00% | 0.85% |
| Polen Growth Inv | POLRX | 10.44% | 15.16% | 13.21% | —— | 2.00% | 1.25% |
Large-Company Stock Funds with the best 5-year performance records:
| Fund Name | Symbol | 1-Year return | 3-Year return | 5-Year return | 10-Year return | Max. Sales Charge | Expense Ratio |
|---|---|---|---|---|---|---|---|
| Shelton Capital Nasdaq-100 Index Direct | NASDX | 4.03% | 17.79% | 15.18% | 10.91% | none | 0.49% |
| USAA Nasdaq-100 Index | USNQX | 04.10% | 17.55% | 14.58% | 10.39% | none | 0.57% |
| Smead Value Inv | SMVLX | -03.56% | 10.33% | 14.55% | ——- | none | 1.26% |
Large-Company Stock Funds with the best 10-year performance records:
| Fund Name | Symbol | 1-Year return | 3-Year return | 5-Year return | 10-Year return | Max. Sales Charge | Expense Ratio |
|---|---|---|---|---|---|---|---|
| Parnassus Endeavor | PARWX | 01.07% | 14.29% | 12.93% | 11.12% | none | 0.95% |
| Alger Spectra A | SPECX | -02.36% | 12.80% | 11.50% | 10.96% | 05.25% | 01.19% |
| USAA Nasdaq-100 Index Direct | NASDX | 04.03% | 17.79% | 15.18% | 10.91% | none | 0.49% |
401(k) Mistake #2: Avoiding Market Matching Index Funds
According to a Morningstar survey, market-matching index funds often outperform actively managed mutual funds.
401(k) Mistake #3: Ignoring Fees
Choosing low fee funds can substantially improve investment success rates. Lower fee index funds can increase returns by up to 1% or more by reducing the amount paid to fund managers.
401(k) Mistake #4: Not Looking at the Whole Pie
Investors often forget to consider all their investable assets when choosing 401(k) investments. For instance, a couple should assess all of their investments to fit them into a cohesive risk profile.
- Joan’s 401(k) Assets: $150,000 stock funds
- Jim’s 401(k) Assets: $100,000 stock funds
- Bank Long-term Savings Account: $60,000
Together, their total asset allocation shows they might be over-invested in stock funds compared to their risk profile.
401(k) Mistake #5: Considering Your 401(k) as Your Own Bank
Borrowing from a 401(k) can seem appealing but may lead to the loss of future compounding growth. Repaying borrowed funds while potentially facing job loss can be risky.
401(k) Mistake #6: Liquidating Your 401(k) Account When You Switch Jobs
Cashing out your 401(k) when leaving a job can lead to severe penalties and taxes, resulting in a significant loss of savings for retirement. It’s important to rollover funds into an IRA to avoid these pitfalls.
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