Common Mistakes of Retirement Plan Participants

Over the years, we've had clients come to us with retirement plans (401(k), 403(b), 457, etc) that are not accomplishing their goals.  Below are some of the most common mistakes that we've seen.   

Not participating: Your retirement plan's sole purpose is for you to save pre-tax dollars for your retirement. It is a way to be disciplined in saving a little bit each month so that you can one day enjoy your retirement years. While the promise of Social Security seems appealing, there is no guarantee that the promises of today will be the promises of tomorrow. If you’re disciplined to save in other pretax ways, then not participating may not be that big of mistake. But, if you’re not saving, then not participating may be the biggest mistake of all.
 
Doing whatever your coworker is doing: Unless your coworker (spouse, best friend, etc) is a financial professional, they are probably not qualified to provide investment selection advice for your retirement plan. While investing in your retirement plan may not seem like real money since you never see it and you are not writing a check, you must remember that it is real money. More importantly, it is your money that you will need to enjoy your retirement years. Would you ask that same person what mutual fund to buy if you had to write a check every month? Probably not. 
 
Set it and forget it:  Managers change, risk tolerances changes, investment options change, goals change, we get older… these are a few of the reasons why the investment choices in your retirement plan need to be monitored and adjusted as you move through your life with your retirement plan. The 5 star mutual fund that you selected 10 years ago may not be the same 5 star fund today.   

Chasing the winners: Too often participants make investment decisions based on what had the highest returns the year or quarter prior. Unfortunately this often leads to participants buying high and selling low which is the complete opposite of what successful investors accomplish. Rather than chasing the winners, you need to understand how much risk you need to take to accomplish your goals and construct a portfolio to accomplish that task. Chasing winners often makes you an investing loser.
 
Invest in everything: One of the most important goals in investing is diversification. Oftentimes participants think that choosing every mutual fund available in the plan achieves this goal. Too many times, we see participants put an equal percentage in every investment option and think that they are “diversified”. This may work if the available options were diversified but often they are not. Your retirement plan may consist of a disproportionate amount of one asset class like large growth funds or fixed income funds. Diversification is important but investing in every fund available is usually not the way to achieve that goal.  
 
Missing the match: Do you know that employers often match a percentage of the dollars that you put in to your plan?  Does your employer?  Do you know?  Missing the match means that if you are not contributing up to the employer's match percentage than you are leaving free money on the table.
 
- For example: Say your employer matches the first 5% and you’re only contributing 3%. This means that you are leaving a 2% contribution on the table. In dollars, say you make $50,000/year and you contribute 3% to your plan. You are contributing $1500/year to your plan. If your employer has a 5% match, you would get a dollar for dollar match on that 3% that you contributed or another $1500/year into your plan.  This amounts to a total contribution of $3000/year. You are doubling your money (before investment gains or losses) by simply contributing. Pretty cool huh?  However, if your employer matches up to 5%, you are leaving $1000 on the table by not contributing another $1000 to your plan. Missing the match means you could be missing out on a big benefit offered by your employer.     
 
Beneficiary Forms:  This is a perfect topic to follow "set it and forget it".  Too many people fill out their beneficiary forms and fail to keep them up to date as changes occur in their lives.  The beneficiary forms determine who will get your retirement plan assets if you were to pass away, not your will!  So if you're divorced and remarried and you haven't updated your forms, your ex-spouse may get your retirement assets if you have not updated your forms.  Keeping beneficiary forms updated is essential to your assets passing to your survivors according to your wishes.  See your Human Resources Department for information on how to update your beneficiary forms.   
  
So what should you do?  

 - First and most important thing is to participate in the plan and figure out how much you should contribute (at the very minimum you should contribute up to your employer’s match).

  - Second, you need to take the time to get educated about your risk tolerance, your time horizon, and your investment options.

 - Third, you need to take the time to review this information at least annually (see "set it and forget it" above).

If you don’t have time to do all three things above, we can help! Click here to Contact us today to discuss your options.