As a plan administrator, it is good practice to take a proactive approach and evaluate whether or not your participants are being properly educated on how they can stay on track to meet their retirement goals. A recent article on usnews.com (http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2010/11/16/5-mistakes-you-may-be-making-in-your-401k) discussed some common mistakes people make in their 401(k) plans that hinder their chances of reaching their retirement goals. Here is a brief overview:
• Participants do not make any changes in their 401(k) plan after their initial enrollment. It is recommended that participants be proactive in checking investments quarterly to ensure that the funds they selected are meeting their expectations and to make changes accordingly. However, it is not recommended to make changes based on daily headlines and fluctuations in the market. Short-term actions can lead to selling low and buying high, which is not conducive to receiving higher returns.
• Asset allocation is important. Participants should evaluate their fund selections to ensure they have the right mix of stocks, bonds and cash. A diversified portfolio usually means higher earnings when the market goes up and decreased losses when it goes down. Most mutual fund companies have general asset allocation recommendations; however, all participants’ needs are different and they should be based on their risk tolerance. Participants’ in 401(k) plans that have financial advisers available should take advantage of that benefit and consult them as necessary.
• Most participants contribute a percentage equal to what their company is matching, which is probably not enough. It is recommended that participants contribute at least six to seven percent of their salary in order to be able to enjoy the lifestyle most people plan for their retirement. More savings will be required due to factors such as people living longer and higher medical expenses.
Pass these recommendations on to your 401(k) plan participants to help them maximize their savings potential for retirement.