A 401(k) plan is like a long-haul flight: minor deviations along the journey can put you off track by thousands of miles and leave you in a completely unintended destination.
Unfortunately, many American workers unwittingly make these small deviations that jeopardize their retirement. This could be because many workers struggle to understand, track, and manage their plans appropriately.
According to a 2024 study by the U.S. Government Accountability Office (1), roughly 92 million Americans have collectively saved more than $7 trillion in their 401(k) plans, but many of them struggle to understand basic mechanisms such as their distribution options when switching employers.
Similarly, a study by Pontera and The Harris Poll (2) found that 85% of plan participants struggle to answer basic questions about the plan.
Given the widespread knowledge gap around 401(k)s, it’s no surprise that many workers make small missteps that snowball into big losses over time. Here are three of the most costly mistakes threatening your retirement.
Workers often start with a default rate of contributions and never think about adjusting it upward.
Many employers set the default automatic contribution rate at around 3%, which is too low for creating a robust nest egg by the time you retire.
An increasing number of 401(k)s now contain auto-escalation features, which ensure that contributions automatically increase, normally by 1%, each year until a cap is reached.
However, there are still many 401(k)s that don’t have this function. And, even if they do, whenever you change employers and are auto-enrolled into a new plan, you could be back on the old 3% default again.
The impact of this can be huge. Assuming a constant $100,000 salary and a steady 10% annual return, a 3% contribution could take nearly 38 years to reach $1 million, which many would consider the bare minimum for a comfortable retirement.
Ideally, you should adjust your contribution rate higher when your income rises. Strategically saving more will get you to your financial destination sooner. Boosting your contribution rate to 5% in the example above would get you to $1 million within 32 years — six years sooner.
Unfortunately, workers are more likely to do the opposite. A survey by Morgan Stanley (3) found that 39% of employees across the country had reduced their 401(k) contribution because of economic concerns about inflation and recession. Gen Z employees were much more likely to do so, with 48% of them saying they cut contributions recently.
Reducing contributions, particularly when you’re young, could have a significant impact on the size of your retirement nest egg over the long term.
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Employer-match features are relatively common and surprisingly attractive. Roughly 98% of companies with a 401(k) plan offer some form of matching, according to the Plan Sponsor Council of America (4), and the average rate ranges between 4% and 6% of pay, according to Carry (5), an online investment platform.
However, only 54% of employees were contributing at or above their employer’s matching rate, according to a 2024 study by Vanguard (6). That means nearly half of all employees are leaving “free money” on the table by neglecting their employer match.
Don’t make the same mistake. These features are designed to be an added incentive for saving and building your nest egg, so take the time to learn how your employer calculates matching benefits and try to maximize your match.
Contributions to a traditional 401(k) lower your taxable income, so not contributing or lowering your contributions could push you into a higher, less favorable tax bracket. Even a modest income shift can trigger a higher marginal rate, raising your overall tax bill.
For high earners, the difference between staying just below a threshold and crossing it can run into hundreds or even thousands of dollars once federal, state and payroll taxes are factored in.
Many workers overlook this. They make contribution decisions based on current circumstances, and the tax implications don’t become clear until the next tax season. By then, it’s too late.
Avoid these subtle tax errors by taking a long-term view of your finances and planning your contributions well in advance. A single dollar saved in taxes today and deposited into your 401(k) has the opportunity to compound into several dollars in the future.
While there are many ways to boost your retirement savings, from contributing more to investing smarter, reducing taxes is probably the easiest lever to pull. Reach out to an expert who can help you navigate all the complex tax rules to optimize your long-term strategy.
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U.S. Government Accountability Office (1); Pontera / The Harris Poll (2); Morgan Stanley (3; Plan Sponsor Council of America (PSCA) (4); Carry (5); Vanguard (6).
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
