This Is the Single Biggest 401(k) Mistake You Might Make

Although 401(k) plans make saving for retirement easy, there’s a reason some people aren’t a fan. You may not love the fact that your 401(k) won’t let you buy individual stocks for your retirement. And you may not be happy with the limited fund choices you’re given — especially if you’re someone who likes to have a say over your investments.

You may also be unhappy with the administrative fees your 401(k) plan charges. It’s common for 401(k)s to charge administrative fees in the ballpark of 0.5% to 2%. But if your plan is at the higher end of that range, it may not sit well with you.

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There’s no rule stating that you have to save for retirement in a 401(k) just because your employer makes one of these plans available to you. But if you skip the 401(k) when there’s a company match involved, you might end up kicking yourself down the line.

Giving up free money is a poor choice

Of the different 401(k) mistakes you might make, like investing your savings too conservatively or failing to pay attention to the fees your investments are charging, passing up an employer match is hands down the biggest one. When you give up an employer match, you don’t just lose out on free money. You also lose out on the chance to invest that money and grow it into a larger sum.

Let’s say you give your company’s 401(k) plan a pass, and in doing so, give up a $2,500 employer match this year. You might think $2,500 won’t make a huge difference in the grand scheme of your retirement. And maybe it won’t.

But if you’re 25 years old and aren’t retiring for another 40 years, you’re also giving up four decades of gains on that $2,500. If your 401(k) generates an average annual 8% return, which is a bit below the stock market’s average, then that missing $2,500 will actually end up costing you over $54,000. That’s a bigger deal.

Never say no to a 401(k) match

Vanguard reports that 50% of its 401(k) plans provided a matching contribution in 2023, while 36% of its plans had both a matching and a nonmatching employer contribution. In other words, employer matches are common in 401(k)s. So before you forget the opportunity to contribute to your workplace plan, see if there’s a match involved — and take it.

You can put the rest of your retirement savings into an IRA if you find that that’s a more cost-effective option from a fee standpoint. And if you feel strongly that you’d rather choose your own stocks than get stuck investing in an index or mutual fund, then by all means, go for that IRA.

But fund your 401(k) up to your employer match first so that you’re able to get your hands on all the free money you’re eligible for. You never know when passing up a few thousand dollars might leave you with a serious financial shortfall later in life.