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Retirement > 401(k)s & IRAs
Top 401(k) mistakes
February 7, 2001: 7:54 a.m. ET

Here are ways to avoid three of the worst nest egg gaffes
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Perhaps you switched jobs recently and decided that the $6,205.41 in your 401(k) would be better put to use on a trip to the Caribbean.

Or perhaps you didn't pay much attention to the account and discovered that all of your funds own the same five tech stocks.

Nobody is perfect when it comes to 401(k) investing. There are a million ways to build a retirement portfolio, and a million ways to screw it up.

  graphic TOP THREE 401(K) MISTAKES  
   
  • 1. You miss out on the match
  • 2. You pick the wrong funds
  • 3. You don't rebalance
  •    
    But there are mistakes, and there are Hall of Fame mistakes that can torpedo your best intentions and keep you working long into your golden age.

    "People are making their portfolios a lot less efficient than they could be," said Pat Jennerjohn, a certified financial planner from Oakland, Calif. "It's not rocket science, but it's not that simple either."

    The three worst bloopers fall into three general categories: contributions, investments and maintenance.

    1.      You don't invest enough to get the match

    Have you ever walked by a $100 bill lying on a sidewalk? That's about the same thing as failing to invest enough to get your company match.


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    In most cases, companies will match your contributions 50 cents on the dollar up to 6 percent, for a total of 3 percent of your salary, financial planners say.

    One rule of thumb is that you should save 15 percent of your salary to build a comfortable retirement. But if mortgage payments, childcare and other life expenses get in the way, at least scrape together enough to get the "free money" from your boss.

      graphic  
         
      At least put in what the employer will match. Or you're missing out on free money.  
         
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      Rich Zito  
    "Don't leave money on the table," said Tom Grzymala, a certified financial planner from Alexandria, Va.

    Let's say you make $50,000 a year. The company matches 50 cents on the dollar up to 5 percent. That means you contribute 5 percent, or $2,500, and your company will kick in 2.5 percent, or $1,250.

    Many companies will kick in their share in stock, rather than cash, Jennerjohn said. There's not much you can do about it, but pay attention to the rest of your portfolio. If you get the 2.5 percent match in ABC stock, you don't want to invest in a fund that owns ABC stock as its top holding.

    "No matter how much you love the company, Wall Street won't love it as much as you do," Jennerjohn said.

    The other extreme is when you don't invest at all. Gryzmala said he's seen cases where people leave a job and cash out their 401(k)s, which squanders their future.

    "They take it out, pay taxes on it and they have nothing for retirement," Gryzmala said.

    2. You pick the wrong funds

    Another big gaffe is when you just invest in the wrong mutual funds. Some people pick blindly from among their selections, putting a little money in every option regardless of how it fits in their long-term strategy, Jennerjohn said. Just because you have six choices, doesn't mean you need all of them.


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    Other people put too much money in fixed income, said Rich Zito, a certified financial planner in New York. They might have been scared off by all of the market losses last year and they figure it's better not to risk any of their money.

    But anyone who has five years or more can afford to take on more risk in exchange for higher long-term returns, Zito said.

    "My dad is in his 50s and he has 100 percent of his portfolio in stocks," Zito said.

      graphic GRZYMALA'S FUND PICKS  
       
  • Thornburg Value
  • Excelsior Value & Restructuring
  • Harbor Capital Appreciation
  • Strong Growth
  • Janus Fund
  • Fremont MicroCap
  •    
    Start by setting your investing goals, figuring out your risk tolerance and determining your time horizon, Grzmala said. Look for funds that are in the top 30 percent of their categories for one and three years, with a long-time manager at the helm. Really read the prospectus to see if you agree with the investing premise.

    "You've got to plan for what happens after you retire," Gryzmala said.

    If you're not sure how to build a portfolio, you could start by putting 25 percent each in small-, mid-, large-cap and international stocks, Zito said. Many plans don't have all of those options, so you can fill in the blanks with an IRA, he said.

    For example, if your plan doesn't have any small-cap funds, then pick one for your IRA. The idea with your choices is to look at all of your retirement money whether it's in your 401(k) or an IRA as one portfolio.

    3. You never rebalance

    A third big mistake is when you don't adjust your portfolio year in and year out to make sure your allocation is still on track. Let's say all of your funds are down for the year. Or all of them are doing well. Something is wrong, Grzymala said.

    "You want to maintain a balanced, diversified portfolio," Grzymala said. When some funds are down, some will be up to balance out your risk.

    But over time, some of the big winners will get out of balance in your portfolio. So if you started out with 25 percent large caps, you might end up with 31 percent after a few years if the category is doing well.

    To rebalance, you sell some of the winning shares and put them in a losing fund, which eventually will turn around.

    "It's psychologically hard to take money out of things that are doing well and put money in things that aren't doing well," Jennerjohn said.

    Jennerjohn suggested people rebalance when they are 5 percent or more away from their target asset allocation for two quarters in a row.

    "It doesn't have to be to the dollar," Jennerjohn said. "this is not precision, this is just keeping things within target."

    Rebalancing will also be a good time to fix any mistakes in your strategy. For example, maybe you picked a world fund for your international exposure, not realizing that world funds can hold up to 60 percent U.S. stocks. Or, maybe you mistakenly put everything in a cash account. graphic





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