41% Of People Don't Realize They're Paying Fees On Their 401(k) – Here's Some Other Common Misconceptions

Millions of Americans count on their 401(k)s to fund their golden years, but many are missing out on big bucks due to common misunderstandings. A U.S. Government Accountability Office report found that 41% of people don’t even realize they’re paying fees on their 401(k). 

Don't Miss:

• Are you rich? Here’s what Americans think you need to be considered wealthy.
• Can you guess how many Americans successfully retire with $1,000,000 saved? The percentage may shock you.

It’s no wonder people are confused. Between juggling work and family, staying on top of financial details is tough. Stuart Robertson, CEO of ShareBuilder 401(k), explains it best in a Forbes article: “Employees are busy managing their day-to-day lives and don’t regularly review their 401(k) to be aware of costs.” 

Contribution confusion: 59% of non-contributing employees mistakenly believe they're contributing to their 401(k), according to a Principal Financial Group survey. In reality, they aren't saving at all. This error can lead to years of missed savings opportunities, a significant shortfall in retirement funds, and a huge disappointment.

See Also: IRS Finalizes 10-Year Rule For Retirement Withdrawals, Making Things ‘Even More Insanely Complicated’

Automatic enrollment assumptions: Many employees assume they’re automatically enrolled in their company’s 401(k) when they start a job. However, this isn’t always the case. The SECURE Act 2.0, set to take effect in 2025, will require most new 401(k) plans to automatically enroll employees.

Contribution limits: For 2024, the IRS has set the employee contribution limit for 401(k) plans at $23,000, with an additional $7,500 for those 50 and older. Since these limits can change annually, not everyone keeps up with the latest rules and limits. Knowing the limits helps maximize your contributions to grow your nest egg. 

Employer matching impact: Employer matching can significantly boost retirement savings. According to Forbes, many employees don’t fully understand or take advantage of this benefit, leaving free money on the table. Studies suggest that contributing at least 15% of your income each year to your 401(k) accounts can help ensure adequate retirement savings.

Trending: A billion-dollar investment strategy with minimums as low as $10 — you can become part of the next big real estate boom today.

Vesting schedules: Some employees confuse their contributions, which are always 100% vested, with employer contributions, which may vest over time. This misunderstanding can lead to surprises if an employee leaves a job before fully vested in the employer’s contributions.

Can’t Lose Money Myth: There's a dangerous misconception that you can’t lose money in a 401(k). While these plans offer tax advantages and potential employer matches, their investments can lose value, especially during market downturns. The U.S. Securities and Exchange Commission warns that 401(k) investments are not guaranteed and can decrease in value. Understanding this risk is key to making informed investment decisions within your 401(k).

See Also: These five entrepreneurs are worth $223 billion – they all believe in one platform that offers a 7-9% target yield with monthly dividends

Inflation adjustment: Many retirement calculations ignore inflation’s impact on future purchasing power. Based on Bureau of Labor Statistics reports, inflation averages about 3% annually over the long term. Failing to account for this can lead to a significant underestimation of retirement needs.

Tax implications: Some assume their retirement tax bracket will be lower, which isn’t always true. Depending on your income sources and changes in tax laws, you might find yourself in a similar or even higher tax bracket in retirement.

While 401(k)s are a wonderful way to build your nest egg, they can also be a little tricky to fully understand. Consider talking to a financial advisor to make the most of your hard-earned cash. They can help clear things up in the confusing world of investments so you can relax knowing your retirement is on track.

Read Next:

• Can you guess how many retire with a $5,000,000 nest egg? – How does it compare to the average?
• This billion-dollar fund has invested in the next big real estate boom, here's how you can join for $10.