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401k Plans: The Risks of Setting and Forgetting

A lightning storm threatens a beautiful house on the Florida waterfront. The title reads 401k Plans: The Risks of Setting and Forgetting

In today’s world, almost everyone’s retirement plans depend not on a pension but on the performance of their 401k plans. While 401ks offer significant benefits, they also come with responsibilities that shouldn’t be ignored. Relying on a “set and forget” mentality can be risky and even lead to several pitfalls, resulting in less-than-optimal outcomes. Effective 401k management requires adjustments to changing retirement plans—such as when your retirement actually begins—as well as strategies for adapting to factors like economic volatility and inflation.

Fortunately, help is on the way. New tools and technologies available to financial advisors can now facilitate the management of 401k plans. With these resources, advisors can provide a more hands-on approach to 401k management that’s guided by professional experience and market knowledge. The goal is to align your retirement accounts with your overall investment goals, all aimed at the retirement you’ve always had in mind. So, we’ll get to some details on what’s in some advisors’ toolkits in a bit. Before that, though, here are five common mistakes that investors make with their 401k plans, along with advice on how to avoid them.

1. Ignoring Required Minimum Distributions (RMDs)

One of the most critical rules for retirement account holders is the requirement to take Required Minimum Distributions (RMDs) starting at age 73. Many people forget this obligation, leading to severe penalties. Failing to withdraw the minimum amount can result in a penalty of up to 50% of the amount that should have been withdrawn.1 It’s not just about avoiding penalties; RMDs also ensure you are systematically utilizing your retirement savings. Regularly reviewing your distribution schedule can help maintain a steady income stream during retirement.

2. Overreacting to Market Fluctuations

Market volatility can be nerve-wracking, but making impulsive changes to your 401k investments in response to short-term market movements can do more harm than good. It’s crucial to stick to a long-term investment strategy and avoid reacting to temporary market dips. Remember, the market has historically trended upward over the long term, and panic selling during downturns can lock in losses and derail your retirement goals. By staying the course, your 401k portfolio stands a better chance of benefitting from compound growth and recovering from short-term losses.

3. Failing to Take Advantage of Catch-Up Contributions

For those aged 50 and older, catch-up contributions are a powerful tool to boost retirement savings. In 2024, individuals can contribute an additional $7,500 beyond the standard contribution limits.2 To maximize the benefit, make sure to adjust your contribution settings at the start of the year. Additionally, review your budget to find areas where you can allocate more towards these contributions. Always consider that small adjustments in spending can lead to significant increases in your retirement savings over time. Making full use of catch-up contributions can substantially enhance your retirement nest egg, providing more financial security later on.

4. Overlooking Roth Options

A Roth 401k allows for tax-free withdrawals in retirement, which could be advantageous depending on your financial situation. Despite this, many investors stick with traditional 401ks out of habit or lack of information. To determine if a Roth 401k is right for you, consider your current tax bracket versus your expected tax bracket in retirement. If you anticipate being in a higher tax bracket when you retire, paying taxes now with a Roth 401k might be beneficial.3 Analyze your long-term financial goals and how a Roth could fit into your overall strategy. Including a Roth option in your retirement plan could diversify your tax liabilities and offer greater flexibility in retirement. Of course, this is the type of decision a financial advisor could help with.

5. Choosing Target Date Funds (TDFs)

Target Date Funds are a popular default option for 401k plans because they automatically rebalance as you approach retirement. However, they are not without drawbacks. TDFs can sometimes involve complex fees that may not align with your financial goals. Additionally, if your retirement date changes, the automatic adjustments of a TDF might not serve your best interests.4 That’s why it’s essential to review your investment choices periodically and consider alternatives that might better fit your evolving retirement plans. Customizing your investment strategy based on your unique situation and retirement timeline can potentially yield better results than a one-size-fits-all TDF approach.

Leveraging Financial Advisor Tools

Some financial advisors have access to tools that help them manage and optimize their clients’ 401k and other retirement accounts, held away assets in particular. “Held away” assets refers to accounts not directly managed by the advisor, such as employer-sponsored 401k plans. These tools allow advisors to monitor and manage these held away assets, ensuring they align with the client’s overall investment goals. Beyond offering features like automated rebalancing, secure account management, and compliance support, the tools also integrate retirement accounts into a broader financial strategy. This is what provides a more complete view of the client’s 401k plans in terms of other investments and goals.

The Takeaway

Avoiding the five common mistakes described here can significantly improve your 401k experience and should reduce the likelihood of “gotchas” when it comes to financing your retirement. Regularly reviewing your plan, staying informed, and seeking professional guidance can help you navigate the complexities of retirement planning and ensure your 401k works effectively for you. Remember, a proactive approach to managing your 401k can lead to a more comfortable and financially secure retirement. And with the help of a financial advisor with tools to help manage your accounts, you can take better control of your 401k’s future, and yours.






Disclosure: This information is for educational and informative purposes and shall not be considered a specific recommendation. Readers are advised to speak with their advisor at JL Bainbridge to determine their specific recommendations that meet their investment objectives and to review their portfolios. The material being provided is thought to be accurate. However, the information is compiled from multiple resources and may become outdated or otherwise rendered incorrect by new research or corrections without notice. J.L. Bainbridge & Co., Inc., is not a broker dealer and does not offer tax or legal advice. Please consult your tax or legal advisor for assistance regarding your individual situation. It should neither be assumed that future results will be as profitable or that a loss could not be incurred. J.L. Bainbridge & Co., Inc. is a registered investment adviser. Registration does not imply any level of skill or training. For more information related to our firm, please see our disclosure brochures at and

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