5 Common 401(k) Mistakes (And How to Avoid Them)

 Your 401(k) is one of the most powerful retirement savings tools available — but only if you use it correctly. Unfortunately, many people make avoidable mistakes that can cost them tens of thousands of dollars over their working years. Whether you're just starting out or approaching retirement, here are five of the most common 401(k) pitfalls — and exactly how to avoid them.

MISTAKE #1

Not Contributing Enough to Get the Full Employer Match

One of the most common — and costly — 401(k) mistakes is leaving free money on the table. Many employers will match a percentage of your contributions, yet countless employees fail to contribute enough to capture the full match.

Think of it this way: if your employer matches 50% of contributions up to 6% of your salary, and you only contribute 3%, you're missing out on half of the employer contribution you're entitled to. Capturing that employer match can significantly boost your retirement savings from day one.

How to avoid it: Find out exactly what your employer's match formula is and make sure you're contributing at least enough to capture it in full. This should be the minimum starting point for your retirement savings strategy.

MISTAKE #2

Cashing Out When You Change Jobs

Job changes are an incredibly common trigger for 401(k) mistakes. When people leave an employer, they're often tempted — or pressured — to cash out their 401(k) balance. This can be a devastating financial decision.

When you take an early distribution (before age 59½), you'll typically owe ordinary income taxes on the full amount, plus a 10% early withdrawal penalty. Depending on your federal and state income tax bracket, a significant portion of your balance could be lost to taxes and penalties — money that can never be recovered through future contributions.

How to avoid it: When changing jobs, roll your 401(k) into your new employer's plan or into a Traditional IRA. A direct rollover keeps your money working, avoids taxes and penalties, and preserves the compounding growth you've worked hard to build.

Not sure if your 401k contributions are structured correctly?— Crown Advisors, LLC offers a complimentary assessment to help you explore your options.

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MISTAKE #3

Ignoring Your Investment Allocations

Many people enroll in their 401(k), pick a few funds, and then never look at their allocation again. Over time, markets shift — and so does your portfolio. A well-balanced mix of stocks and bonds can drift significantly, leaving you either overexposed to risk or too conservative at a time when you need growth.

Younger investors who set a conservative allocation early may miss out on years of higher equity participation. Conversely, those nearing retirement who never adjusted from an aggressive allocation may find themselves overexposed when markets decline.

How to avoid it: Review your 401(k) allocation at least annually, and after major life events. Consider target-date funds if you prefer a hands-off approach — these automatically shift to a more conservative mix as your retirement date approaches. Better yet, work with a financial advisor to align your 401(k) with your broader financial plan.

MISTAKE #4

Taking Out a 401(k) Loan

Your 401(k) is not a savings account — but many people treat it like one. While most plans allow participants to borrow against their balance, this strategy comes with hidden costs that are easy to underestimate.

When you take a loan from your 401(k), that money is no longer invested and growing. Loan repayments are made with after-tax dollars, yet those same dollars will be subject to income tax again upon withdrawal in retirement — a meaningful tax inefficiency to consider. And if you leave your job before the loan is repaid, the outstanding balance typically becomes due immediately, potentially triggering taxes and penalties.

How to avoid it: Treat your 401(k) as untouchable until retirement. If you need emergency funds, explore other options first — a HELOC, a personal loan, or ideally, a dedicated emergency fund. A general guideline many financial planners reference is three to six months of living expenses held in accessible cash savings, though the right amount varies by individual circumstances.

MISTAKE #5

Failing to Increase Contributions Over Time

It's easy to set your contribution rate when you first enroll and never revisit it. But if you got a raise — or several — over the years and didn't increase your contribution rate accordingly, you may be saving far less than you should be.

Lifestyle inflation is real. As income grows, expenses often grow to match, making it feel like there's never extra money to save. However, even small annual increases — say, 1% per year — can have a meaningful impact on your retirement balance over a 20–30 year career.

How to avoid it: Whenever you receive a raise or bonus, consider increasing your contribution rate by at least 1%. Many 401(k) plans now offer an 'auto-escalation' feature that automatically increases your contribution rate each year — enroll in this if it's available to you and set it to the maximum allowed increase. Your future self will thank you.

The Bottom Line

Your 401(k) has the potential to be the cornerstone of a comfortable retirement — but only if it's managed thoughtfully. Avoiding these five common mistakes may help improve your retirement outcomes over time.

If you're unsure whether your 401(k) strategy is working as hard as it should be, we invite you to schedule a no-obligation introductory consultation. Our advisors are registered investment adviser representatives who can help you evaluate whether your retirement savings strategy is aligned with your goals. Contact us to learn more.

Important Disclosures

This content is for general educational purposes only and does not constitute personalized investment, tax, or legal advice. It does not take into account your individual financial situation, objectives, or risk tolerance. Individual results will vary based on personal circumstances, including income tax bracket, state of residence, and other factors. Past investment performance is not indicative of future results.