The Truth About The 401k – Myths Exposed

| August 31, 2023
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A 401(k) retirement account is a powerful tool for your financial future to help you  prepare for later years. Companies offer this program to eligible employees, and it’s an ideal path to create your retirement savings. However, many misconceptions surround this investment account, and lack of 401k knowledge can cost you.

Find out how 401(k) myths can hurt your long-term wealth. Yes, investing in your workplace 401(k) is essential, but there’s more to retirement investing than that!

Choose investments wisely and invest outside your 401(k) account as well. Learn the truth about the 401k and how to maximize retirement investing.

10 Retirement Myths-Believe at Your Own Peril

Check out our list of 401(k) myths exposed to achieve the best out of your retirement plan:

401k Myth #1 – The 401k Is the Best Place for All of My Retirement Savings

Not necessarily.

There are many types of 401k plans, some better than others. You hope your workplace 401k plan generally has low-fee mutual funds and low management expenses. It’s also desirable for your 401k to have a point person or offer access to professional advice for your questions.

If your 401k investment choices are filled with high fee, actively managed mutual funds, excess company stock, or other less desirable choices, you might need to consider other types of investment accounts for your retirement dollars. In this case, only invest enough in your employer’s 401k plan to receive the company match. Invest the remaining retirement savings in a Roth IRA or Traditional IRA outside the company plan.

Understand the fees that your 401k plan is charging. If they’re too high, get the employer match and open a Roth IRA!

401k Myth #2 – If I Invest the Minimum in My 401k, Then I’ll Have Enough Retirement Savings


The myth is false. What if you’re age 35 and you invest $100 per month for 30 years in your retirement account? Let’s take a conservative approach and assume that the $100 is invested each month in a fixed bond fund with an average rate of return of 3% per year. At age 65, your account will be worth $58,419. You’ll have invested $36,000 over 30 years, which won’t double when invested.

The average monthly Social Security retirement benefit for a retiree in June, 2023 is $1,701.62. The amount changes monthly.

You need to invest enough money and receive high enough returns to give you more significant growth than 3% per year. Social Security won’t be enough to fund most people’s retirement, and thus, you must make up the difference.

In general, you’ll need to invest at least 10% to 15% of your income, depending upon your age, in both stock and bond funds to have a comfortable retirement. Develop an appropriate asset mix and invest enough per month to fund the difference between your expected Social Security benefits and your financial retirement needs.

401k Myth #3 – I Don’t Need to Worry about Adjusting My Retirement Target for Inflation since it’s Been so Low


Many retirement calculations ignore inflation. During the decade preceding 2022, inflation was very low. Not anymore!

Consider this reality, you were born in 1988 and were given $10,000 at birth. When factoring in inflation’s impact, it would take $21,877  to purchase in 2020 what the $10,000 bought in 1988. That means you need to invest your money for retirement so that it will grow and compound more quickly than inflation.

Put it in another way: With an inflation adjustment, an investment in the S&P 500 stock index in January 1988 would yield an annualized 5.9% return after accounting for inflation, according to the DQYDJ calculator. That’s akin to an 8.56% return without considering inflation’s impact. 

Don’t forget to factor in inflation when calculating your future investment returns!

401k Myth #4 – Your Tax Bracket Will Be Lower When You Retire

Maybe so, or maybe not.

Retirement investing requires making assumptions. When you invest in your 401k, you are saving on taxes today, with the expectation that when you withdraw your retirement money in the future, you’ll be in a lower tax bracket. Yet, this may not be the case.

Let’s stroll down memory lane with taxes as we did in the previous inflation myth section.

Notice that marginal tax rates haven’t been as low as they are now since the 1920s and 1930s. During most of the 1900s, the marginal tax rates were much higher than now. This fact raises the question, “Are you certain you’ll be in a lower tax bracket when you retire?”

You may assume your income will be significantly lower in retirement, yet, remember that at age 72, you must begin withdrawals from all of your retirement accounts except your Roth IRA. That required minimum distribution (RMD) will likely increase your taxable income. Don’t assume you’ll be in a rock-bottom tax bracket in retirement. 

In the future, income tax rates may drift upward, and your taxable income may not be as low as expected. When doing your retirement planning, consider that your tax rate may not be lower when you stop working than it is today.

401k Myth #5 – My 401k is Free & I Don’t Need to Think about Fees


There are various fees you may be assessed when investing in your 401k. The myth that 401k investing is free is rubbish. The U.S. Department of Labor encourages consumers to consider fees when investing in their employer’s plan. Following are sample fees you might encounter in your workplace retirement account:

  • Plan administration fees: Cover the day-to-day operation of the program.
  • Investment fees: Every mutual and exchange-traded fund (ETF) charges a fee, generally a percentage of assets under management. The lowest fee index funds might charge 0.03%, whereas an actively managed mutual fund could charge up to 0.90% or more.
  • Sales charges: Some investments come with a special commission fee, charged when the particular investment is bought and/or sold. These fees may also be called ‘loads.’
  • Service fees: These charges might be a flat monthly amount or a specific expense for participating in special plan features.

401k Myth #6 – It’s Best to Buy as Much Company Stock as Possible at a Discount


Many employers offer employees the opportunity to buy company stock at a discount. Don’t assume that this’s a ‘can’t miss’ opportunity. Regardless of how fabulous your company is, consider diversifying your retirement monies. Imagine if your company hits a rough patch and its stock value tanks. Then, for added injury, you’re laid off.

There is a significant problem with over-investing in company stock. With the average 401k plan participant holding more than 7% of her investment portfolio in company stock (according to the Investment Company Institute), you may accidentally set your portfolio up for future losses.

Diversification is the bedrock of successful investment management. The benefit of maintaining a diversified investment portfolio is that when one stock, fund, or asset class tanks, you’ll have others that counteract the drop and increase in value. If you have too much invested in your company stock, even if bought at a discount, you’re opening up your financial future to the possibility of potential loss should your company hit a rough patch or suffer an investment market decline.

401k Myth #7 – Your Employer Takes Care of Your 401(k) on Your Behalf


Even if your employer is the 401k sponsor, they aren’t your investment manager! Their role is limited to contributing money toward your savings, a percentage of your contribution (employer match). It’s your responsibility to look out for your future by managing your 401k and picking the appropriate investments.  

Otherwise, you fail to meet your retirement goal if you leave the management of your 401k to your employer or 401k administrator.

Fortunately, there are excellent online resources to aid in your educational education and your 401k management company may offer educational resources. 

401k Myth #8 – You’re Automatically Registered for Your Employer’s 401(k) Plan 

It may be the case or not.

Although many employers automatically enroll their employees in their 401k plan, don’t assume it’s the case with your employer. Take the initiative to contact the HR officer and verify your enrollment. 

If you’re already enrolled, confirm that You agree with the contribution amount. If not, adjust it depending on your investment goals and capability.

Also, it’s essential to understand:

  • If the employer will make changes throughout the year.
  • Your investment options other than target date funds.
  • How you can change your investment options.
  • The costs of your 401k investment options.

401k Myth #9 –Target Date Funds Are the Best 401k Investing Strategy

Yes, to some extent.

The target date funds investment strategy is popular for a one and done investment strategy. The target date fund choice is based on your anticipated retirement date (2030, 2040…).

The investment funds within the target date fund are initially allocated to higher return, more volatile stock market funds. As you get closer to your retirement date, the asset allocation becomes more conservative, with greater allotments to more stable bond funds. This investing strategy keeps your 401k investment strategy hands-off.

Target date funds aren’t all alike, so it’s important to review the fees charged by the fund. You might want to meet with a plan advisor to ensure that you understand all of your 401k investment options. 

401k Myth #10 – You Don’t Need to Review 401(k) Statements


Reviewing your 401(k) statement several times a year is a wise move. 

It’s wise to make sure your contributions and your employer’s match are being invested according to your preferences. 

Understand that investments in financial markets go up and down. So, don’t panic when you notice a decline in the portfolio’s value. This is a normal cost of investment. The long term trend of financial markets is up!

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Category: Personal Finance

About the Author ()

Barbara Friedberg, MBA, MS is a former investment portfolio manager, author of Personal Finance; An Encyclopedia of Modern Money Management and two other investment books. Friedberg is a former university Finance and Investments instructor, and publisher of Robo Advisor Pros and Barbara Friedberg Personal Her work has been featured in U.S. News & World Report, Yahoo! Finance, Investopedia, GoBankingRates, TheBalance and more. She offers a free finance and investment management tool. You will get top level money management tools for retirement planning, budgeting and investment management.

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