How to Maximize 401k Returns by Avoiding Common Pitfalls

401k optimizer
Co-Authored and Reviewed by Gagan Sandhu, MBA - The University of Chicago Booth School of Business, CEO of Xillion
Posted on . 3 min read

Investing in a 401(k) is usually the smart thing to do — but not all 401(k) investments are equally smart. In fact, you might think you’re doing everything “right” — maxing out your employer match, contributing the full amount, investing in index funds — but you can still be leaving hundreds of thousands of dollars on the table over the course of 10 to 20 years.

We’re going to assume you know the basics of 401(k) strategy:

1) Max out your contribution if possible.
2) Don’t actively manage your retirement portfolio.
3) Try not to withdraw 401(k) funds before retirement.
4) Reduce your investment risk as you approach retirement age.

Even if you’re following all these best practices, there’s still usually room for a lot of improvement. Here are a few of the most underappreciated 401(k) investment mistakes:

Investing in specialty retirement funds with high fee structures.

Investment platforms such as Vanguard, Fidelity, and Charles Schwab offer mutual funds intended to simplify retirement investing. For example, a “2050 Retirement Fund” would allocate a mix of stock and bond index funds appropriate for someone wanting to retire in 2050. The investment allocation changes automatically as you get closer to retirement, reducing the portfolio risk. The downside of these funds, however, is that they often have higher fee structures (in some cases 40x more expensive) than if you were to allocate the investments yourself. The investment platforms are charging for convenience. But if you can figure it out — and Xillion can help — you get the benefit of greater control over your investments, lower fees, and higher returns.

Being overly risk-averse while you’re still young.

When it comes to retirement, you might think it’s better to be safe than sorry. But while you’re still early in your career, you want to steer investments towards index funds instead of bonds. Over long periods of time, index funds tend to generate a predictable return of around 10% (S&P 500 index long-term returns), compared to the 5-6% return of long-term government bonds. This difference might seem minor on paper, but it can add up to six figures for a portfolio of $10,000.

Investing in target funds with the wrong end date.

This one is pretty simple: remember those “2050 Retirement Funds” we discussed? Well, if you own a “2030 Retirement Fund” and you plan on retiring in 2050, you will really be missing out on investment opportunities. Funds aimed at people retiring sooner tend to be less risky, but with the expected tradeoff of generating a lower return.

Leaving cash in your account.

If you’re leaving too much cash in your account, you’re almost certainly leaving a lot of money on the table. This is especially true with inflation so high, since cash doesn’t appreciate in value to keep up with the rising costs. Keeping 401(k) funds in cash is especially unwise if you’re far from retirement, since that’s when you stand to gain the most from investing in a higher-return index fund. If you’re close to retirement and still looking for a lower-risk investment, then there are lower-risk bond indexes and low-risk securities indexes that provide steady, low returns without as much risk.

Multiple Accounts

Leaving money across multiple accounts as you switch jobs is likely to reduce your overall return. We wrote more about it here. Xillion helps you connect all your accounts and optimize your portfolio across them.

Striking the right balance on all of these is difficult, but we can help. Xillion’s 401(k) Optimizer scans your 401(k) account to look for all the inefficiencies. We’ll suggest simple changes you can make and show that those can add up to a big difference over time.

To get started, set up your Xillion account for FREE today and navigate to the Portfolio tab to see suggestions for how you can optimize your path to financial independence. And if you have any questions along the way, our investment mentors are here to help.

Share this:
You may also like...
Why you should not invest in target date funds
Retirement Savings
Posted on . 1 min read
The real cost of Starbucks coffee
Retirement Savings
Posted on . 1 min read