How 401 k Plans Work

What to Watch Out For

Here are some things to watch out for:

  • Having a high percentage of your company's stock - Since the Enron debacle, many companies (and employees) are taking a look at their 401(k) offerings and evaluating the mix of outside stocks with company stock. It is not recommended to have more than 20 percent of your portfolio with one stock. Some companies encourage employees to buy their stock and may even give the 401(k) matching amount in company stock rather than cash. This creates a very unbalanced portfolio for employees.
  • Missing out on some of the employer match because you don't contribute enough - For example, say your company matches 50 cents on the dollar up to five percent of your salary. That means that if you only contribute three percent of your salary, you're missing out on some of that free money. Let's look at the numbers. If you earn $40,000 per year, that means contributing $1,200 (three percent) would mean your employer is only contributing (matching) $600 rather than the $1,000 they would be putting into your account if you were contributing the full five percent ($2,000). In this scenario, you are losing $400 per year in free money. That may not seem like such as terrible thing, until you look at what that single year's lost $400 would do in 20 years at an average stock earning of 10 percent -- that $400 would grow to $2,955.62.