12 Costly 401(k) Pitfalls—and Practical Ways to Steer Clear, Whether or Not You’re Going Through Divorce

Dec 22

Why small 401(k) decisions can have a big impact

If you’ve been saving for retirement for years (or decades), you’ve already done the hard part: you built the habit. Now the goal shifts from “save something” to “save smart”—so your 401(k) is positioned to support the lifestyle you want later.

For many people, a 401(k) ends up being the largest retirement account they own. And unlike old-style pensions, most 401(k) plans don’t automatically turn into a predictable paycheck when you retire. That puts more responsibility on you to make solid choices around contributions, investments, taxes, and withdrawals.

The tricky part is that the most expensive mistakes are often the most ordinary ones: missing a match, forgetting an old account, paying unnecessary fees, or making emotional decisions during a market drop. Fixing these “leaks” can meaningfully improve your odds of staying on track.

Quick takeaways

Max out the match first. If you’re missing part of your employer match, you’re turning down an immediate 100% return you can’t replicate elsewhere.
Simplify where it makes sense. Too many old 401(k)s can create confusion, leave money poorly invested, and complicate beneficiary updates.
Plan taxes on purpose. As you approach retirement (often peak earning years), your choice of pre-tax vs. Roth contributions should reflect your expected tax rate later.

The 12 most common 401(k) mistakes—and what to do instead

1) Not contributing enough to capture the full employer match

Why it hurts: Employer matching dollars are one of the best benefits in personal finance—because they don’t require market performance to be valuable.

Example: If your employer match is 50% of your contribution up to 6% of your salary, and you only contribute 4%, you’re giving up the match on the last 2%. If your salary is $100,000, 50% of that last 2% is $1,000 in “free money” you didn’t collect.

Better move: Confirm (with HR or your plan website) the exact match formula and set your contribution rate to at least the level that earns 100% of the match.

2) Losing track of old 401(k) accounts

Why it hurts: It’s surprisingly common for retirement accounts to get “left behind” after job changes. Estimates suggest there are nearly 32 million forgotten 401(k) accounts in the U.S. totaling over $2 trillion.

Even if you know where your accounts are, multiple plans can mean inconsistent investments, duplicate funds, and outdated beneficiaries.

Better move: Consider consolidating old plans into a single Rollover IRA or your current employer plan using a direct (trustee-to-trustee) transfer, and then make sure the new account is actually invested to match your target allocation.

3) Cashing out a 401(k) after leaving a job

Why it hurts: This is one of the fastest ways to shrink a retirement nest egg—because of taxes, penalties, and lost compounding.

Example: A $100,000 401(k) cashed out today can trigger ordinary income tax and a 10% early withdrawal penalty if you’re under age 59.5 years of age. You also give up future growth. That same $100,000 could compound to $386,968 if it earned an average of 7% annually for 20 years with no further contributions (hypothetical).

Better move: Use a rollover strategy instead of taking cash—roll to an IRA or into your new employer plan so the money stays tax-advantaged.

4) Treating a 401(k) like an emergency fund (loans and early withdrawals)

Why it hurts: Loans can create job-change risk. If you leave your employer with a loan outstanding, you may have to repay quickly. If you can’t, the unpaid balance can become taxable—and may also trigger the 10% penalty if you’re under 59.5 years of age.

Better move: Keep your 401(k) for retirement. If you need short-term liquidity, explore alternatives first (cash reserves, budget triage, or possibly a HELOC depending on your situation).

5) Not understanding vesting rules on the employer contribution

Why it hurts: Some (not all) plans require you to work a certain number of years before employer contributions are fully “yours.” Vesting is simply the ownership schedule for employer-provided dollars.

Better move: Ask HR for your plan’s vesting schedule before you make a job change decision—especially if you’re close to becoming fully vested.

6) Holding too much company stock in the 401(k)

Why it hurts: Concentration risk. If your employer hits a rough period, you could face both employment risk and investment risk at the same time.

Better move: Many experts (including Morningstar research) suggest keeping company stock exposure below 10% of your total account value.

7) Chasing the “best-performing” fund without a real allocation plan

Why it hurts: A strong recent return doesn’t automatically make a fund appropriate for your time horizon or risk tolerance. Without an allocation plan, you can accidentally overload one asset class (for example, putting 80%+ of your portfolio into one equity category).

Better move: Start with an allocation (stocks/bonds/cash mix) that fits your goals—then choose funds to implement that plan, not replace it.

8) Not reviewing and rebalancing your portfolio

Why it hurts: Over time, winners can dominate your portfolio. If stocks outperform bonds for multiple years, you may become more aggressive than you intended—right when you’re getting closer to retirement spending.

Better move: Review and rebalance at least once a year (or use an automatic rebalancing feature if your plan offers it).

9) Ignoring fees and expense ratios

Why it hurts: Fees compound in the wrong direction. Even a 1% higher expense ratio can cost you tens of thousands of dollars over decades. The same goes for plan-level administrative or recordkeeping fees that quietly reduce returns.

Better move: Compare expense ratios and favor low-cost options (often broad index funds) when the exposures are similar.

10) Getting surprised by the mandatory 20% withholding on certain 401(k) distributions

Why it hurts: If you take a distribution paid to you (instead of sending it directly to another retirement account), federal rules generally require 20% withholding on eligible rollover distributions.

Withholding isn’t always the final tax bill—and it can also disrupt your rollover plan if you intended to move the full amount.

Better move: When moving money, request a direct rollover (trustee-to-trustee). A direct rollover generally avoids the 20% withholding entirely.

11) Choosing Roth vs. pre-tax contributions without looking at your current bracket

Why it hurts: Many people over 50 are in their peak earning years. If you’re in a high bracket now and default to Roth contributions, you may be passing up a valuable deduction today. Conversely, if you expect higher taxes later, Roth may be strategically valuable.

Better move: Make the choice intentionally — based on your expected tax rate now vs. retirement, plus your plans for Roth conversions and withdrawal sequencing.

12) Making emotional decisions during market volatility

Why it hurts: Panic-selling can turn a temporary decline into a permanent loss (selling low, then buying back after prices recover).

Better move: For long-term savers, the “boring” approach is often best: keep contributing, follow your allocation, and rebalance if appropriate rather than reacting to headlines.

Stronger 401(k) habits that are easier than “fixing it later”

Automatic annual increase: Set an auto-escalation of 1% per year if your plan offers it.
Automatic rebalancing: If you’re not using a target-date fund, see if your plan can rebalance to your chosen mix at set intervals.
A yearly check-in: Put a recurring reminder on your calendar to review contribution rate, investments, and beneficiaries.
Keep a clean “money map”: Maintain a simple document listing all accounts, logins, beneficiary designations, and your target allocation.

How a fiduciary advisor can support your 401(k) plan

If you’re thinking, “I can do this, but I’d rather not do it alone,” that’s normal. A fee-only fiduciary advisor can help you:

Build a retirement roadmap with clear projections and assumptions
Coordinate all accounts (401(k)s, IRAs, brokerage, cash) into one allocation strategy
Reduce avoidable taxes through smart contribution choices, rollover planning, and timing decisions
Create a withdrawal strategy that coordinates portfolio withdrawals with Social Security planning

Ready to simplify your 401(k) and feel confident about retirement?

If you’ve saved consistently, you deserve clarity—without the nagging feeling that a preventable mistake is quietly undermining your progress. Your 401(k) is too important for guesswork.

At FMD Wealth Advisors, we help clients stress-test retirement plans, clean up scattered accounts, and build a coordinated investment + tax strategy designed for real life—not just spreadsheets.

Frequently Asked Questions

What happens if I don’t contribute enough to get my employer’s full match?

You’re effectively declining free compensation. Using the same example: if your employer match is 50% of your contribution up to 6% of your salary, and you only contribute 4%, you forfeit the match on the last 2%. With a $100,000 salary, that’s $1,000 you didn’t collect.

Another way to view it: if you assume 2,000 working hours per year, $100,000 is about $50 per hour. Giving up $1,000 is like giving up 20 hours of pay.

Can I contribute to both a traditional and a Roth 401(k)?

If your employer plan offers both options, yes—you can split contributions between traditional (pre-tax) and Roth (after-tax) while staying within the annual limit. For 2026, the employee limit is $24,500 plus $8,000 catch-up contributions if you are over age 50.

How often should I rebalance my 401(k)?

For most savers, an annual rebalance is enough. Many plans also offer automatic rebalancing, which can help you stay aligned without extra work.

What’s the difference between a 401(k) and an IRA?

A 401(k) is an employer-sponsored plan. An IRA is an individual account you open independently. 401(k)s typically have higher contribution limits (for 2026, $24,500 plus $8,000 catch-up if you’re over 50) and may include an employer match. IRAs often offer broader investment flexibility but have a lower contribution limit in 2026 of $7,500 plus a catch-up of $1,100 if you are over age 50.

Do states tax 401(k) withdrawals?

It depends on the state. Many states tax pre-tax 401(k)/traditional IRA withdrawals as ordinary income, while some provide exclusions or credits for certain retirement income. Social Security treatment also varies by state. Because rules differ, it’s worth reviewing this as part of your retirement tax plan.

Article References

Disclosures: FMD Wealth Advisors LLC (“FMD Wealth Advisors”) is a Registered Investment Adviser.

This material is for general information only and is not individualized legal or tax advice. Consult your attorney and CPA regarding legal and tax matters specific to your circumstances. This content is intended to provide general information about FMD Wealth Advisors. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain an understanding of our investment philosophy, our strategies and to be able to contact us for further information.

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Fabian Degen