401K(s) have certainly been on a wild ride these past few years. While many people panicked out of the stock market at its nadir, and still others are just now getting back into stocks, there are other mistakes that are a bit less obvious. Of course, 401K advice is ubiquitous, if not always of high value. One of the most common nuggets is to avoid funds with fees above a certain number (usually around 1%). While I have been on record as saying that this is an overblown concern (slightly at least) it is nonetheless a reasonable recommendation. But in the real world, many people don’t have vast options available to them in their 401K(s). So while it may be nice, all things being equal, to be able to select very fee-stingy funds, it is often impossible to find. A fund may have low expenses but be lousy, while another one has a solid 20 year track record with higher fees. Most commonly, there are only 10 to 15 funds to choose from to begin with and while lower fees might be nice, it might also be impossible. This article on the supposed “botching” of people’s 401K, mentions this piece of advice as well. But it really concentrates on what are considered the two biggest mistakes that investors are making with their retirement plan.
A research director from some organization called the Employee Benefit research Institute claims that these are the biggest problems:
VanDerhei says novice investors make two major mistakes when it comes to their 401k’s: Not having an asset allocation appropriate for their age, and putting too much of their 401k into company stock.
I do think there is something to those concerns, but they are also tough ones to “research”. For example, maybe an investor has many assets in real estate or stocks outside of the 401K and is being very conservative in the retirement plan for a reason. But presuming that the research took all of the nitty gritty details into account, let’s address these problems. It is generally true that people, especially younger investors, are too often ultra conservative with their money. The last nasty bear market barely being in the rearview mirror hasn’t helped in this department either. Even without that though, conservative investors are often just happy to see their portfolio go up every year. Add in the fact that an employer contribution bumps it up even higher, and many people are happy with their 401K even when they are doing the “wrong” thing.
However, it is undeniable that younger people should be as aggressive as possible. That more than anything will give them a fighting chance at a spectacular 401K result in the end. As far as company stock goes, yes it can be a problem, although I think it was much more common 10 or 15 years ago than today. Sometimes, with a company that is doing well, the amount balloons to a huge percentage of one’s 401K assets almost accidentally. This is especially true of those aforementioned ultra conservative investors. As their company’s stock soars it becomes an over weighted asset even that much more quickly.
In short, there is no doubt that asset allocation and company stock percentages should be very high priorities when one is assessing their 401K. Whether or not they are the two biggest mistakes may be up for debate, but there is certainly no arguing with their importance. Asset allocation, as we have discussed often, is a topic that should be tackled in or out of one’s 401K. But, the single biggest mistake regarding 401K(s) is, of course, that you are not in it all. Even those making mistake after mistake in their 401K are better off than those without one at all.