6 Common Things You’re Doing WRONG With Your 401k and How To Fix It For Free!

6 Common Things You’re Doing WRONG With Your 401k and How To Fix It For Free!

This post may contain affiliate links, which means I might make a small commission at no additional cost to you.

The below are 6 things wrong with your 401k. Though some financial advisors will try and charge you to manage your 401k and other accounts, there’s actually a free tool you can use to fix your 401k in minutes. Check out Blooom. They also have a free tool for the 401a, 403b, 457 or TSP for free.

1. Not Contributing, Putting In Enough Money, Or Setting Up Auto-Contributions

Half of Americans are not contributing to a 401k. If you’re one of them, set up your 401k by talking to your Human Resources department. When you do set it up, know that you can put in $18,500 pre-tax per year and invest it for retirement. This maximum changes every few years by $500 due to inflation, so always check the new limits at the end of the year.

If you’re putting in very small percentages in your 401k, consider upping that contribution by 1 percent a month, until you can go no further. You’ll find it’s not as difficult as you might think. 1 percent too easy for you? Increase by 2 or 3 percent.

It’s also important to set up auto-contributions so that you can pay yourself first. If that money is taken out of your paycheck before you spend it, you won’t be able to miss it and be tempted to spend it on something you don’t really need.

Related: The Three Step Blueprint To Paying Off Your Student Loans In Record Time

2. Not Taking Advantage of the Company Match

Companies with a good 401k plan will match the amount you contribute to your 401k, up to a certain percent.

For example, if you have a 6 percent match and make $40,000 a year, you can get an extra $2,400 from your company just by contributing money yourself to your 401k. If you contribute $2,400, the company will contribute $2,400 as well, so your effective compensation is higher by thousands of dollars due to the match.

So many people don’t take advantage of this though. Don’t be one of them.

A word of caution though, some companies will do something like only match X percent of each paycheck. So if you contribute 30% of your paycheck at the end of the year because you have enough saved up for expenses, you’ll might only get 6 percent of that paycheck matched. So check with your HR department before you put in more than that to try and max out your 401k earlier in the year.

The 401k company match is free money. A 100% return. Please take advantage of it. If you’re confused, please ask HR so that you can collect that free money!

Related: 20 Free Money Tools And Resources To Fix Your Finances

3. Investing In Same Funds With High Expense Ratios (Fees)

401k Providers call the fees on a fund “Expense Ratios”. Due to the fact that your company picks the 401k provider and you can’t just go and pick one, they can basically charge high fees because you can’t switch 401k providers until you leave the company.

Here’s an example of highway robbery via a fund that performs like the SP500. I did the math on how much the average american will lose due to expense fees here and it’s something like $200,000. A fee you think is small will turn a huge loss over time due to compound interest.

Vanguard charges .04% for VTSAX. The Ryder SP500 fund has an expense ratio of 1.57 %. That’s 39 times the cheaper option. If we assume that historically the SP500 returns roughly 7 percent after inflation, we can see how terrible those expense ratios are.

Compound interest is an amazing thing, but high expense ratios are just awful.

Let’s assume we started with $1,000. If you invested in the Ryder fund, you’d end up with $8,290 after 40 years. If you invested in the Vanguard low expense ratio fund, you’d end up with $14,750. You nearly double your money, just by choosing the fund with the lower expense ratio of two funds that are very similar in investable assets. Nearly doubling your money is the difference between $500,000 and $1,000,000. Which one would you rather have just for clicking a button and choosing the lower expense ratio fund?

Related: How To Triple Dip On Cash Back Rewards

4. You Have The Wrong Stock/Bond Ratio Mix

The further you are from retirement, the more you should be invested in stocks. The closer you are in retirement, the more you should be invested in bonds. This is because the further you are from retirement, the more time you have to wait out market downturns. Recessions happen roughly every 7-10 years historically, so if you are a 20 year old, you should be ok to wait out those market downturn if you’re planning on a traditional retirement, as the stock market returns 7 percent after inflation on average historically.

As you get closer to retirement, you don’t really want to risk a market downturn because you won’t have the ability to ride out that recession. Because of the lack of time until then, you should be much more invested in bonds, which give you a fixed rate of return and are much less risky when we talk about volatility.

There are a couple of formulas, but I like this one. The rule used to be that the percentage of stocks you own should be 100 – age, but I think 120 – age is much better. The average life expectancy for an American is 80 years old now, but increases every decade. Research and development increase exponentially, and with the surge of health and wellness knowledge, if you take good care of your body, on average you can expect to live longer than the average.

If you don’t want to recalculate this every time you check your 401k, you can run your portfolio through Blooom and they can spit out the numbers for you easily.

5. Actively Managed Funds Are Not Always Worse

In the financial industry, there is the concept of alphawhich tells you how much a certain fund outperforms its benchmark. A common benchmark would be the SP500.

When I started contributing to my 401k, I decided to choose a plan that produced alpha. A common argument against this is that most funds will not produce alpha in perpetuity due to human bias. It depends on what your risk tolerance is, mine is high. I chose VHCAX (which you can no longer invest in unless you’re grandfathered in). The expense ratio if .37 %, 9x the fees of VTSAX, but it creates 1.5% alpha per year, which means it returns on average 1.5% more than the SP500, it’s benchmark.

Here’s the table for VHCAX’s return:

Here’s the table for VTSAX’s return:

Both of these tables were taken off the Vanguard website. You’ll notice both have been in effect for roughly 2 decades. VTCAX has outperformed VTSAX in excess of the fee by at least a percentage point for all points of comparison. So, it was worth it to me to pay the extra in expense ratio. Now, you shouldn’t just pick a fund without an investment thesis. The short version of why I liked it was because it was actively managed in pharmeceuticals, tech, and oligopolies (airline industry to name one industry) and I believe those sectors outperform others on the long-term.

On average, actively managed funds perform worse than passive investments like the SP500. However, if there’s a fund producing alpha and for decades, for me that’s something I’d take a chance on.

Related: 50 Self Development and Growth Books That Are Integral To Life

6. You Never Rebalance Your Portfolio

Once you fix your stock/bond ratio, you need to keep that ratio relatively in balance. The reason this ratio changes is because one portion, either stocks or bonds, will move more than the other. In our case, your stock percentage will increase by much more over the course of your life. This is because stocks have higher after-inflation adjusted returns over the course of time.

Remember that your bond allocation should increase over the course of your life. This means you’ll need to change your ratios (rebalancing) of stocks and bonds every once in a while. Consider rebalancing twice a year or when your allocations are out of balance by 5 percent or more.

One way to get around this is to just invest in a Target Date Fund. This is where your 401k provider automatically rebalances for you, but usually with a hidden cost. In the case of Vanguard, if you invest in just Target Date Funds, you’ll never get what they call “Admiral Shares”, which have expense fees over 50 percent lower. Admiral shares and Investor shares are exactly the same. It’s just that Admiral shares have a lower expense ratio — you can get Admiral shares when you reach a minimum in your account.

Related: The Step By Step Guide To Where Your Money Should Be Invested

Fix Your 401k For Free

All this sound overwhelming? Blooom has created a FREE online tool to help you with some of the above issues. It will tell you:

  • If the funds you’re currently invested in have fees that are too high
  • If you have the right asset allocation for stocks and bonds
  • Are you being too conservative in your allocations? Or are you taking too much risk?
  • It’ll tell you how to fix the above problems for free.
  • The information they give isn’t super technical (but the analysis and numbers they crunch are!). So you’ll actually understand what they’re saying without a bunch of technical jargon.

What are you guys investing your 401k in? How did you make that decision?

*VTCAX performed in excess since inception, which is a fair comparison given all the other yearly returns. Please note that VTCAX was created halfway through the dotcom bubble.

Author: Olivia

Olivia worked in finance and wants you to learn the secrets of financial independence. She believes there are so many ways to monetize your life and make money doing the things you're already doing because so many companies offer free money.

The average savings account rate is 0.1%. The big banks have incredibly low savings accounts rates. CIT Bank offers a 1.75% savings account. You can open an account with just $100 and no monthly fees or charge . Tired of being charged fees and getting peanuts in interest at your current bank? Open a CIT Bank savings account in less than 15 minutes online.

If you have a car, Rideshare apps allow you to pick a direction you want to go twice a day, so you can get extra money going somewhere you were driving to anyway at least twice a day. Get a $300 sign-up bonus with Lyft.

One of my favorite ways ways of monetizing my life is via credit card bonuses with cards that give you cashback or rewards. Check out our review of the Chase Sapphire cards, which give you at least $500 in cash or $625 in travel credit.

12 thoughts on “6 Common Things You’re Doing WRONG With Your 401k and How To Fix It For Free!

  1. Hey, I got one to add. Don’t invest in your company stock in your 401(k). That’s putting too many eggs in one basket. I did that during the dot com bubble and lived to regret it.
    Good stuff.

  2. I currently max out the match for my 401k – 8% – but not the 401k itself. I do max out an HSA and Roth IRA.

    My 401k doesn’t have a lot of choices. It does have target retirement funds with a 0.09% expense ratio. The cheapest choice as far as expense ratio is company stock (which I don’t want since there’s no discount) with an expense ratio of 0.02% – although what the expenses are in a single-stock portfolio, I don’t know.

    1. 8% is super nice! That’s a pretty good ER, nice choice! Funny on the single stock mgmt fee, no clue what it would be for either. Glad you have such a good target date fund though!

    1. Lol, this is something I didn’t even realize. I’ll add this too! Do you just use an IRA? Not as good but better than nothing! Glad to hear you’re getting one soon!

  3. Great list, I would like to add another one, not rollover your old 401K to an IRA. If you leave your money invested in a former employer’s 401K, you have to pay the fees that are associated with account and the longer you leave in it the more fees you pay. Rolling it over to an IRA will reduce fees and plus you have more investment options to select from.

    1. I did, and it tries to get your portfolio to conform to something out of basic portfolio theory, which is great for beginner investors who have no clue what they’re doing, and other investors to at least check if their portfolio is at least close to their baseline.

      1). I mentioned above my entire portfolio is in VHCAX, which has an ER of .37%. Blooom didn’t like that because of the high ER (Target date are less than half as much in ER). I chose VHCAX for its alpha (~1.5%/yr over the course of two decades, which is something I’d gladly take), but I don’t think Blooom takes into account alpha (I’m sure there are legal reasons for that, recommending a highly volatile fund like VHCAX would probably cause the avg investor to react on market events or something and would probably not get them optimal results in the long run if they can’t just let their portfolio sit). 2). I put in that I wanted to retire at 35 since that was the earliest age allowed in the system. It recommended an appropriate mix of stocks/bonds and didn’t like mine since VHCAX is 100% equities. 3). It also recommended that I split up my equity allocation into different segment – large cap, mid, etc., which I found pretty interesting. It weights more risky allocations of stocks (ie, small cap growth stocks) the further you are from in retirement.

      The only reason I mentioned my actual fund now is bc prior to this I was worried people might follow and invest in it and then freak out when it will inevitably tank more than the mkt during a downturn due to its heavy investment in tech/pharma. The fund is currently closed unless you’re grandfathered in, so no one can invest in that exact fund just based on this blog post.

      It’s definitely a cool tool for people to check their allocation. If you check it out, since you’re an advanced investor, you can see why they wrote the algo as they did, but might choose to go after more alpha or a riskier allocations (saw your post about trading your way to the Cartier watch). The only thing that might make it better would be to ask about risk-tolerance questions like some of the robo-advisors do, but I haven’t found another company that manages 401ks or checks them so this one is the best right now IMO.

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Author: Olivia

Olivia worked in finance and wants you to learn the secrets of financial independence. She believes there are so many ways to monetize your life and make money doing the things you're already doing because so many companies offer free money.

The average savings account rate is 0.1%. The big banks have incredibly low savings accounts rates. CIT Bank offers a 1.75% savings account. You can open an account with just $100 and no monthly fees or charge . Tired of being charged fees and getting peanuts in interest at your current bank? Open a CIT Bank savings account in less than 15 minutes online.

If you have a car, Rideshare apps allow you to pick a direction you want to go twice a day, so you can get extra money going somewhere you were driving to anyway at least twice a day. Get a $300 sign-up bonus with Lyft.

One of my favorite ways ways of monetizing my life is via credit card bonuses with cards that give you cashback or rewards. Check out our review of the Chase Sapphire cards, which give you at least $500 in cash or $625 in travel credit.