Day One at your first job typically goes a little something like this: Show up; feel relieved you are dressed appropriately; attempt to hide that relief; attend orientation; marvel at the concept of paid vacation days; hide in the bathroom to avoid the 401(k) election form.
At that point, if you’re anything like 22-year-old me, you call a lifeline. I dialed my brother, who gave me a brief 401(k) rundown, asked if the company would match my contributions — it would — and told me to sign up. He probably used the words “free money,” as people tend to when describing the benefits of a 401(k) match.
They do that because it is actually free money: When your company matches your contributions, they’re compensating you in addition to your salary. Your own contribution, on the other hand, is pulled out of your paycheck, and needless to say, that was a sticking point for me. I would have gotten behind the idea of free money I could pocket immediately, but free money I wouldn’t see for 45 years didn’t excite me, especially when it meant taking home less money every month. I opted out.
I stayed at that job for a year. Assuming a 6% annual return, my decision will cost me around $50,000 in retirement savings, more than I made in a year at that job. It’s a mistake I still think about. Don’t be me: If your new 401(k) comes with matching dollars, contribute whatever percentage of your salary is required to earn them. Then avoid these four other 401(k) missteps:
1. Using the waiting period as a savings vacation
Your 401(k) paperwork may not come during orientation — some employers levy a waiting period before new workers are eligible to join the plan; there may be an additional wait before you’re offered a match.
It’s a convenient excuse to put off saving, but it isn’t a good one; there are other options. One is a Roth IRA, an individual retirement account you open on your own. A Roth is especially well-suited to entry-level workers, because you get to lock in today’s tax rate: You pay taxes on your contributions, but any earnings and distributions in retirement are tax-free. (Here’s a full rundown on Roth IRAs.)
In a lot of ways, saving for retirement is about throwing a bone to old-age you, and a Roth is a very big bone. It also gets you into the habit of saving. When you’re finally eligible for that 401(k), participating will feel like a breeze rather than a new burden on your budget.
2. Settling for the default election
Increasingly, employers are making 401(k) participation the default option. You have to opt out if you don’t want to participate.
That allows our inertia to work for us, rather than against us, and leads to increased participation: According to human resources consulting firm Aon Hewitt, 83% of workers in their 20s participate in their retirement plan when they are automatically enrolled, compared with just 33% who participate when they have to enroll themselves.
But even if your plan opts you in, your work is not done. An earlier study from Aon Hewitt found the average contribution rate was actually lower in plans with automatic enrollment, likely because the default rate is set too low and workers fail to adjust it. Your goal should be increasing your contribution rate by 1% or 2% a year, until you’re saving 15% of your income, including the employer match. That 15% is a general guideline aimed at allowing you to replace 70% to 90% of your income in retirement. (If you want a more personalized goal, use a retirement calculator.)
Be sure, too, that you’re in the investments you want to be. Most plans with automatic enrollment put you into a target-date fund, which aligns with the year you plan to retire and automatically adjusts its investment mix to be more conservative as you age. These funds can be a great, relatively hands-off solution, but they also can be significantly more expensive than selecting a few low-cost funds on your own.
3. Swallowing a pricey plan
Speaking of expenses: There’s a chance your 401(k) has high ones, especially if you work at a small company. You’ll pay fees on the investments you choose, plus administrative fees if your employer passes those along — costs for things like paperwork to make sure the plan stays on the right side of the law.
It’s up to you to know what you’re paying — a 401(k) fee analyzer can do the math — and take steps to shave high costs. That could mean reevaluating the investment selection a couple of times a year to see whether new, cheaper options have joined the table. Typically, 401(k)s have a curated selection of mutual funds, often around 20 in all.
Another option for reducing high 401(k) fees is to contribute just enough to get your employer match, then shift additional savings to an IRA. Investments you choose within an IRA will still have fees, but you’ll have access to a wider selection so you can shop around for the lowest costs. You’ll also avoid the administrative fees of a 401(k). If you max out the IRA — the 2017 IRA contribution limit is $5,500 — pause to smugly pat yourself on the back, then resume contributions to your 401(k).
4. Cashing out instead of rolling over
It’s hard to imagine at this point, but one day you may leave this shiny new job for something even shinier, and unless you have an especially low-cost 401(k), you’ll probably want to take your savings with you. Good options for doing so include rolling over the balance into your new employer’s plan, if possible, or into an IRA. You’ll want to evaluate the fees of the new accounts before making a decision.
Bad options include cashing out and pocketing the savings. You’ll pay a 10% penalty, plus income taxes — in other words, you could kiss a third or more of that hard-earned balance goodbye.
Arielle O’Shea is a staff writer at NerdWallet, a personal finance website. Email: [email protected] Twitter: @arioshea.
This article was written by NerdWallet and was originally published by Forbes.