Making the Most of Your 401(k): Five Mistakes to Avoid

Do you know what your 401(k) is actually doing? Most employees enroll as soon as they qualify. In fact, about 80% sign up when they first start a job, according to the Center for Retirement Research at Boston College. Unfortunately, enrollment is often where engagement ends. Nearly half of Americans are unaware of how their 401(k) is invested, and many never adjust their contribution rate or investment choices throughout their employment. These oversights, along with other avoidable mistakes, can limit growth and long-term retirement income. However, a disciplined, goal-focused framework can help investors align their savings with their goals, support proper asset allocation, and encourage thoughtful adjustments as life progresses. Here are five common missteps investors make with their 401(k).

1. Failure to Engage in your 401k

Getting started is important, but staying engaged is what drives results. Many participants set their contribution rate and rarely, if ever, revisit it. Over time, salaries increase, but deferrals remain unchanged. Even a 1% increase in 401(k) contributions can significantly improve long-term balances, especially when employer matches are in play. According to Fidelity Investments, the average employer match is 4.8% of an employee’s annual earnings. Without periodic increases, investors risk leaving both growth potential and earned compensation behind.

That is why consistent oversight is vital in retirement outcomes. Regular reviews help ensure that investors continue to increase their contributions and maximize their employer match. They also provide an opportunity to confirm that investments still align with the participant’s time horizon and risk tolerance. A practice of consistent check-ins built around clear retirement income goals will prove more effective than passive participation in the long run.

2. Saving Too Little for your 401k

Many employees do not contribute enough to their 401(k) to sustain their future income needs.

According to the Federal Reserve’s Survey of Household Economics and Decisionmaking (SHED), only 35% of non-retirees believe their retirement savings are on track. That gap reflects contribution rates that fall short of long-term objectives. Financial professionals generally recommend saving 10% to 15% of income over a career, including employer contributions. Yet many participants contribute well below that range during their career.

Low savings rates result in lower balances over time with fewer dollars compounding year after year. Automatic escalation features can help close the gap, especially for those who infrequently interact with their 401(k). Vanguard’s research shows that plans using automatic enrollment and escalation can meaningfully increase average deferral rates compared to voluntary enrollment alone.

Effective 401(k) planning connects current savings to projected retirement income. Instead of focusing on account balance, it evaluates whether contributions today align with income needs tomorrow. When investors anchor their strategy to income needs, contribution decisions become clearer and more intentional.

3. Ignoring Asset Allocation

Asset allocation drives long-term returns. Investment choices that lack a clear strategy can lead to inconsistent results.

For example, some investors who remain overly conservative for decades may struggle to outpace inflation. Others may concentrate heavily on equities without considering volatility, leading them to react emotionally and sell at a loss in unstable market conditions. Both approaches introduce risk, and thoughtful allocation to balance growth and stability can make all the difference in 401(k) performance.

The importance of rebalancing cannot be overstated. As markets shift, portfolios drift away from their intended mix. Periodic adjustments restore alignment and reinforce discipline.

4. Borrowing or Withdrawing Too Soon from your 401k

A 401(k) is designed for retirement. Using it for short-term needs can create lasting setbacks.

Early withdrawals trigger immediate penalties and tax consequences. The Internal Revenue Service (IRS) imposes a 10% penalty on most withdrawals before age 59 ½, in addition to ordinary income tax. More importantly, early withdrawals remove assets that could have compounded for years.

Loans disrupt progress when they are not repaid consistently. The Employee Benefit Research Institute estimates that billions of dollars leave defined-contribution plans annually due to cash-outs and loan defaults.

A comprehensive retirement strategy treats 401(k) assets as long-term capital. It integrates emergency reserves and other liquidity sources, so participants can avoid tapping retirement funds during short-term disruptions.

5. Ignoring the Bigger Picture

A 401(k) is one piece of a broader retirement strategy. Social Security timing, tax diversification, healthcare planning, and required minimum distributions (RMDs) all influence long-term income.

For example, adjusting between pre-tax and Roth contributions can provide tax flexibility later in life. Planning for RMDs can help manage taxable income in retirement. Coordinating these elements improves predictability and supports sustainable withdrawals.

Retirement readiness develops through consistent attention and informed decisions over time. Investors who revisit their contribution rates, confirm asset allocation, and coordinate their 401(k) within a broader strategy strengthen their long-term position.

If you would like a professional review of your 401(k) and how it fits into your overall retirement plan, schedule a complimentary consultation with an SHP Financial advisor. SHP’s Retirement Road Map® is a holistic framework that considers the five major areas of retirement readiness, including income planning. We can help you develop your 401(k) so you can move toward your retirement goals with confidence and purpose.