Are you making a mistake in your 401(k) without even realizing it? Not everyone has access to a 401(k) plan, but if you do, it’s one of the most powerful ways to save for retirement. At District Capital, we often help professionals in their 30s and 40s identify hidden 401(k) mistakes that could cost them thousands over time. Choosing to participate in your 401(k) is a smart first step, but without the right strategy, small errors can derail your long-term financial goals.
In this guide, we’ll break down the 9 most common 401(k) mistakes to avoid and share expert retirement planning tips to help you maximize your 401(k) savings.
Mistake 1. Leaving your 401(k) up to chance
There are two crucial questions to ask yourself when contributing to a 401(k):
How much am I contributing?
How is my 401(k) contribution invested?
Did you make these choices deliberately, or let your employer choose your default options?
Often, a default amount, usually a percentage of your pay, will be taken from your paycheck and sent to your 401(k). This amount is generally the minimum required to receive the employer match and is probably not as much as you should contribute to your retirement savings.
Once your 401(k) contribution comes out of your paycheck, it gets sent to the financial institution that holds your 401(k) plan. There is usually a default investment fund if you do not choose one for yourself, often a target-date fund. Target-date funds may not be the best choice for everyone.
Target-date funds sometimes have higher fees than other investment funds and match the investment allocations in that fund to your age without considering your personal risk tolerance or retirement goals. Some plans don’t invest the money in the market at all, leaving your money in a money market account with limited growth opportunity.
It is essential to be intentional in your 401(k) decisions regarding how much you save and where your money is invested. This is your hard-earned money, and it’s there to allow you to live freely in retirement.
>> Related: Don’t forget to download the ‘Should I Contribute To My Roth 401(k)?’ flowchart if you haven’t already.
Mistake 2. Focusing on past performance of your 401(k)
I once had lunch with a former coworker at a nonprofit in Washington, D.C. She shared how she had just signed up for her 401(k). I asked her, “How did you choose where your 401(k) contributions will be invested?” She replied, “Oh, it’s straightforward. I looked at all the 401(k) fund options and chose the ones that performed well in the past five to ten years.” It’s intuitive to pick winners, but this method can be misleading.
The problem with this is that sometimes, in life, that method doesn’t apply. For example, in basketball, I often followed the NBA. In 2017/2018, the Golden State Warriors dominated the league. They were NBA champions. Going into 2019, a lot of people still thought they were going to do a three-peat. They were up against the Toronto Raptors. The Golden State Warriors lost, and the Raptors won.
It’s the same with investing. Investing based on past performance is like driving while looking in the rearview mirror. Investing can be cyclical, and past performance data may not indicate future results. It’s essential to look forward and consider various factors, not just historical data.
Mistake 3. Over-diversifying your 401(k)
We all know that diversification is crucial. We don’t want to put all our eggs in one basket. However, over-diversification can be counterproductive. Let me tell you another story about another former coworker of mine in the same nonprofit. She was also signing up for a 401(k) and said, “Hey, Alvin, can you look at this for a second? I’m about to submit my 401(k) allocation.” She had chosen around 15 different funds and put equal amounts of money in each for a diversified fund.
This approach often selects good and bad funds and creates a random mix of stocks and bonds.
A strategic plan is better than randomly picking funds in the name of diversification. This is where the value of a financial planner comes in. A financial planner can guide you in selecting 401(k) funds based on the correct diversification principles, cost, and risk tolerance.
Mistake 4. Not contributing enough to get the employer match
One of the most significant advantages of a 401(k) is the employer match. Many employers will match a portion of your contributions, essentially giving you free money towards your retirement.
Let’s say you make $100,000 in salary, and your employer provides a 3% 401(k) match. If you work for this company for ten years and you do not contribute to your 401(k) and thus do not get the free employer match, you will leave more than $34,000 of free money on the table. It can be more if you factor in the investment earnings from that employer match. (This assumes you get a 3% salary raise each year.)
Not contributing enough to get the full match is like leaving money on the table. Ensure you understand your company’s matching policy and contribute at least enough to take full advantage of it.
Mistake 5. Not increasing your contributions over time
Many people set their contribution rate and then forget about it. However, as your salary increases, it’s often wise to increase your contributions. If you want to save more to retire early, aim to increase your contribution rate by at least 1% each year or whenever you get a raise. Gradually increasing your contributions can substantially impact your retirement savings over time.
You can contribute the maximum amount each year if your household finances permit. For 2025, the 401(k) contribution limit is $23,500 for employee contributions and $70,000 for combined employee and employer contributions. The total combined contribution limit is $77,500 if you’re 50 and older, and $81,250 for those aged 60-63.
Mistake 6. Borrowing from your 401(k)
Many people are tempted to borrow from their 401(k) when buying a house because they figure they owe the money to themselves. However, when you borrow from your 401(k), you take advantage of potential investment growth on the borrowed amount. This can be detrimental to your long-term savings.
You may face penalties and taxes if you leave your job and are asked to repay the loan immediately. You may also need to repay the loan using after-tax dollars. Exploring other options before tapping into your retirement savings is often best.
Mistake 7. Forgetting about your 401(k) when changing jobs
When you change jobs, you have four options for your 401(k): cashing out, leaving it where it is, rolling it into your new employer’s 401(k) plan, or transferring it into an IRA.
Cashing out can result in significant taxes and penalties, significantly reducing your retirement savings. Leaving your 401(k) with your previous employer can make tracking your 401(k) accounts and maintaining a cohesive investment strategy difficult. However, it might be worth keeping if the plan offers exceptional investment options and low fees.
While rolling your 401(k) into an IRA is an option, it’s not always the best choice for everyone, depending on your situation. We sometimes recommend rolling over our client’s 401(k) to their new employer’s plan, especially if the new 401(k) has much better investment options. The optimal choice always depends on one’s specific circumstances.
The key is to have a strategy for your 401(k) when changing jobs. This is a crucial financial decision, and seeking advice from a fee-only financial advisor is highly recommended.
Mistake 8. Leaving your job before your 401(k) has vested
401(k) vesting refers to when your employer’s contributions to your 401(k) account permanently become yours. Some 401(k) plans vest company contributions immediately, while others require you to work for several years before you can retain any of the employer’s matching contributions.
Understanding your company’s 401(k) vesting rules is essential. If you leave a company before your 401(k) plan is fully vested, the company will take back any unvested money, including interest earned.
Mistake 9. Ignoring the Roth 401(k) option
Not everyone has the Roth 401(k) option, but it’s worth considering if you do. You use after-tax dollars when contributing to a Roth 401(k). While you don’t get a tax deduction now, your money grows tax-free, and qualified withdrawals in retirement are tax-free. So, let’s say that over the next five years, you put in $80,000, and you double, triple, or quadruple that in the market over time. You’re not going to pay taxes on the money that you make if you put that money in a Roth 401(k).
Now, this isn’t for everyone. The decision between a traditional 401(k) and a Roth 401(k) depends on your current and expected future tax brackets. A financial planner can help you determine the best option based on your circumstances.
Don’t make these common 401(k) mistakes
Avoiding these common 401(k) mistakes can help you build a robust retirement portfolio and achieve your financial goals. Be intentional about your contributions and investments, avoid focusing solely on past performance, and seek professional guidance when needed.
By making informed decisions, you can avoid costly mistakes and maximize your 401(k) plan.
Interested in holistic financial planning with District Capital?
If you want a comprehensive financial plan, including 401(k) recommendations, schedule a free discovery consultation with one of our fee-only financial planners today.
FAQs
1. What happens if I miss out on years of 401(k) contributions?
Missing contributions can significantly reduce your long-term retirement savings because you lose both the contributions and the compound growth they could have earned. Even small gaps can add up over decades.
2. Can I change my 401(k) investments after I’ve already chosen them?
Yes. Most plans allow you to adjust your fund selections at any time. Reviewing your allocations periodically can help ensure they still align with your goals and risk tolerance.
3. How do I know if my 401(k) fees are too high?
Your plan’s annual disclosures list administrative and fund fees. Comparing them to low-cost index funds or speaking with a fiduciary financial advisor can help you assess whether you’re paying more than necessary.
4. What should I do with multiple old 401(k) accounts?
Consolidating into a single account, such as your current employer’s plan or an IRA, can simplify management and reduce the risk of losing track of accounts. The right choice depends on fees, investment options, and your overall financial strategy.
5. How often should I review my 401(k) strategy?
At least once a year, or whenever you experience a major life event such as a new job, marriage, or nearing retirement. Regular check-ins help you stay on track and adjust for changes in income or market conditions.
Alvin Carlos, CFP®, CFA is a fee-only financial planner, in Washington, D.C. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is the founder of District Capital, a financial planning firm designed to help professionals in their 30s and 40s maximize their money and retire by 55, through holistic financial planning and research-driven investing. Schedule a free discovery call today.
