Are You Making These 3 Common 401(k) Allocation Mistakes?

Retirement planning can be an exhausting task, all the “what-ifs” and uncertainty about what the future can bring can make it seem like none of the specifics really matter until you’re knocking at the door. The most common way people prepare is by contributing to their company’s 401(k) to fund their future. It’s one of the most powerful tools available for retirement savings, but even the most hands-on investors can fall into traps that limit their portfolio’s potential. Today, I wanted to review three common mistakes I’ve seen many people make with their 401(k) allocation and how to steer clear of these pitfalls to work toward a secure retirement.

1. Relying Too Heavily on Target-Date Funds

Target-date funds are a popular choice for 401(k) investors because they offer a convenient, hands-off approach to retirement planning. These funds automatically adjust your asset mix based on your expected retirement date, becoming more conservative as you get closer to that target. In the early stages of your career, this might seem like a great option—after all, it aligns with a "set-it-and-forget-it" philosophy. However, this strategy can go off the rails quickly as you approach your target.

While these funds may reduce volatility by shifting into bonds and other conservative investments, they often do so too aggressively. The result? Your portfolio might not have enough exposure to equities, which could limit growth in your retirement years. Given the increasing life expectancy, retirees are spending more years in retirement, which means you need your investments to continue growing to outpace inflation and maintain your purchasing power.

Instead of fully relying on a target-date fund, consider regularly rebalancing your portfolio and maintaining a healthy mix of equities throughout retirement. A more tailored strategy can ensure that your money continues working for you, even after you stop working

2. Overloading on Company Stock

It’s natural to have faith in the company you work for—after all, your livelihood depends on it. Many companies even offer discounted stock purchase plans, encouraging employees to buy shares through their 401(k). These offers are appealing and can be great tools to build wealth but overreliance can disproportionately expose you to risk.

Consider what we saw with the collapses of Enron or Lehman Brothers. Employees who had a significant portion of their retirement savings tied up in company stock not only lost their jobs but also saw their retirement funds wiped out. We recommend no more than 10% of your total portfolio to avoid overexposure to the risks associated with one company. The key here is diversification—not only across sectors but also across asset classes and geographic regions. A well-diversified portfolio is the best defense against any single company's downturn derailing your retirement

3. Option 2: Overlooking the Roth 401(k) Option

Many employers now offer a Roth 401(k) option, but we've seen so many investors who aren't even aware that it exists. A Roth 401(k) allows you to contribute after-tax dollars, meaning that qualified withdrawals in retirement will be tax-free. For investors who expect to be in a higher tax bracket in retirement or want more tax diversification, the Roth retirement options can help get creative with income later in life.

Failing to consider a Roth 401(k) means missing out on the chance to potentially lower your future tax burden. If your employer offers this option, it’s worth weighing the benefits of splitting your contributions between traditional and Roth 401(k) accounts to achieve greater flexibility in retirement.

Revisit and Refine Your 401(k) Strategy

Avoiding these common 401(k) allocation mistakes can make a significant difference in your retirement outcome. Whether it’s rebalancing your portfolio to avoid being too conservative, reducing your exposure to company stock, or ensuring your target-date fund aligns with your evolving needs, taking action now can safeguard your future financial security.