There’s no escaping the litany of advice when it comes to developing good 401(k) habits. But what about those bad habits that sneak up on you when you least expect it? These hard-to-break mannerisms can, unfortunately, leave you with a less than comfortable retirement.
Here are a handful of bad 401(k) habits. Do they sound familiar to you?
“Why start my 401(k) now? I have plenty of time.”
The fundamental rule every 401(k) educator tells you is similar to that old joke about voting: do it early and often. The idea here is to take advantage of all the time you have before you retire.
That time is both a blessing and a curse. It’s a blessing because of the power of compounding. A little saving goes a long way by the time you retire.
But that long time period also gives you a false sense of security. You justify procrastination because you have “plenty of time.”
Luckily, your company can take care of this for you. If your plan is set up correctly, you don’t have to worry about how to avoid this bad habit. The plan avoids it for you.
“A common mistake participants make is not enrolling immediately when they become eligible,” says Jacqueline Reeves, Managing Director at Bell Rock Capital in Boca Raton, Florida. “Educating employees when they are hired as to when they are eligible is helpful, but what works for certain is automatic enrollment as part of the plan design. This plan feature may not be for every plan sponsor, but it certainly helps this common mistake.”
“I’m getting the full match, so I’m saving enough.”
It’s one thing to start saving. It’s quite another thing to save an adequate amount. Here, you’re almost always pointed to an easy-to-understand target: maximizing your company match.
Like time, the lure of the match has its advantages and disadvantages.
“A very common error in thinking by plan participants involves investing just enough to get the company match,” says John Shrewsbury. Co-owner of GenWealth Financial Advisors in Little Rock, Arkansas. “They erroneously think if they contribute enough to get all the company match, ‘they are doing good.’ While it is a good thing to maximize the employer’s contribution (you certainly want to do that), that level of contribution has very little relevance to you being able to achieve your retirement goal.”
The real number that’s important to you isn’t how much you need to save in your 401(k) to get the full match; it’s how much you need to save to retire in comfort.
“Sometimes the hardest thing to convince a participant to do is to calculate an adequate deferral rate,” says Kit Gleason, VP/Senior Relationship Manager at First Bank & Trust in Sioux Falls, South Dakota. “They would rather use the auto-enrollment rate or matched rate as a suggestion and stop there without considering whether it will get them to their goal or not. Every provider out there has easy-to-use calculators on their website. Use them!”
Choosing the best savings rate for you is not something to put off. You can get into a rut if you don’t tackle this issue right away. And you know what they say about ruts. When you’re in one, it’s tough to get out of it.
“Once participants choose to use their 401(k), it can be hard to convince those who are currently not maxing out their 401(k) every year to change this pattern if they can afford to do so,” says Eric Phillips, Senior Director of Financial Partnerships & Strategic Insights at Human Interest in San Francisco. “The most common way this mistake happens is a participant has simply set their contribution percentage too low and forgets to change it later or throughout the year.”
“Time’s up. I’m done. I can cruise from here.”
Behavioral economists will tell you about the fallacy of anchoring. Anchoring occurs when you focus on an arbitrary number, falsely believing it possesses some significance. The company match number is one of those terribly misleading anchors.
But it’s not the only one. Your own age or the completion of your vesting period can give you deceptive signals. You might (wrongly) conclude once you hit a certain age, you’re all done, even though you’re still working.
You see this with “individuals who are age 59½ or older who failed to continue contributing or who stopped contributing after also completing the period of service required to fully vest in the employer contribution,” says Jack Towarnicky, Of Counsel at Koehler Fitzgerald, LLC in Powell, Ohio.
These are arbitrary points in time and may or may not have any real meaning to your own personal schedule. Don’t view them as a stopping point. Stick to the time benchmarks that matter most to you.
“What’s hot? What’s not? I need to know now!”
Even participants who understand the power of compounding over long time periods will still fall into the bad habit of chasing the ticker. Do you constantly log onto your 401(k) account to see its current value? If so, you might be chasing the ticker.
Unless your job entails securities analysis and portfolio management, you’re doing yourself a disservice if you’re paying too much attention to the undulations of your retirement account.
“A common mistake is participants micromanaging investments,” says Emily C. Rassam, Senior Financial Planner at Archer Investment Management in Charlotte, North Carolina. “Building an all-weather portfolio and holding onto it for a long period of time gives you the greatest opportunity for success. When savers look at the list of 401k investment options, their eyes often find the mutual funds with the largest past performance, but past performance is not indicative of future results. Chasing returns or trying to avoid losses can lead you to select funds that are high and ignore funds that are low.”
“The market’s in trouble. I want to protect my hard-earned savings.”
You’re not out of the investment woods yet. This has been such a common bad habit among 401(k) savings from the very beginning that Congress passed a law in 2006 to discourage this mistake.
If you’re old enough, you remember laughing when you heard stories about your grandparents putting their savings in their mattress because they didn’t trust the bank.
There’s a moral equivalent of this on the 401(k) investment menu. These are the options meant to protect your savings from losing money. Sure, there’s a useful purpose with these options, but only if you’re about to retire or already in retirement. If you’re not, then these options represent the epitome of the bad 401(k) habit.
“The bad habit that can be hard to correct is sitting in ‘safe’ investments despite having a very long-term horizon until retirement,” says Jeff Coons, Chief Risk Officer at High Probability Advisors in Pittsford, New York. “Illustrations of just how infrequent stock/bond blends deliver negative returns over very long time horizons can help lessen participant risk aversion, as well as regular communication by the plan’s adviser in difficult market environments.”
The breaking of this bad 401(k) habit is all the more difficult because it requires financial professionals to accept that they also have to break their own bad habits when it comes to investing. The old school of Modern Portfolio Theory would have these pros explain things in terms that are both less understandable and less reliable.
“It’s typically hard to explain to younger and mid-career employees just how important it is to accept greater risk in their retirement portfolios,” says Matthew Eickman, National Retirement Practice Leader, Qualified Plan Advisors in Omaha. “That’s particularly challenging because it’s not healthy for advisors to dictate what a participant’s risk tolerance should or should not be. This leads advisors to better embrace the importance of goals-based saving and investing. Participants are more comfortable with risk if they better understand the importance of portfolio growth in their pursuit of specific goals.”
Did any of these five bad 401(k) habits sound eerily familiar to you? If so, you’re not alone. But you now have the advantage of knowing how to steer clear of these detrimental dispositions.
“While participants should try to avoid these common mistakes, addressing them sooner rather than later will pay off in the long run,” says Ralph Ferraro, SVP and President, Retirement Plan Services at Lincoln Financial Group in Radnor, Pennsylvania. “Take the time to focus on your overall financial wellness, which includes a plan to save for retirement. Set a savings goal, save at least enough to meet your employer match, and understand that while you may have several competing financial priorities, you shouldn’t leave saving for retirement off your ‘to do’ list.”
Can you think of some bad 401(k) habits beyond the ones listed here? Be a hero. Share your own thoughts in the comment section below because your knowledge might just make the difference for someone else.