Your 401(k) is probably one of the most powerful tools you have for building wealth, but most people treat it like the crockpot of investing. Set it, forget it, and hope it doesn’t burn.
The problem? Employers often hand you a welcome packet, a default fund, and maybe a match, and then send you on your way. They’re not sitting you down to explain compounding interest, tax advantages, or how to pick funds with the lowest fees. It’s not that they’re hiding anything; they just assume you’ll figure it out.
The truth is, a few smart moves can seriously level up your 401(k) returns. We’re not talking about risky bets or chasing unicorn stocks; we’re talking about small, strategic tweaks that can make a big difference over time. So if you’ve ever felt like your retirement account is just limping along, this one’s for you.
1. Don’t Just Take the Default Investment Option
When you first sign up for a 401(k), there’s usually a default investment your employer or plan provider drops you into; often a target-date fund. These are designed to adjust risk as you age, which sounds nice, but they’re not always the best fit.
Target-date funds can carry higher fees and sometimes invest too conservatively, especially if you’re decades away from retirement. The result? Lower potential returns and missed growth opportunities.
Instead, review the fund lineup. Look at expense ratios, historical performance, and how each fund is diversified. Don’t let autopilot decide your future; take the wheel and customize your investments.
2. Increase Your Contributions Over Time
If you’re contributing just enough to get your employer match, that’s a solid start, but it’s far from maximizing your potential. You want to aim for 15% of your gross income if you can swing it. If that feels like too much, work your way up slowly.
One sneaky trick? Boost your contribution by 1% every time you get a raise. You won’t feel the difference, but your future self will be high-fiving you. Many 401(k) platforms also allow you to set automatic annual increases. Use that feature; it’s like a money growth hack.
3. Watch Out for High-Fee Funds
Not all investment funds are created equal; some quietly eat away at your returns with high fees. These expense ratios might seem small (0.75% vs. 0.10%), but over decades, they can cost you tens of thousands of dollars.
Most people don’t even notice these fees because they’re taken out behind the scenes. Actively managed funds often come with higher costs, and they don’t always outperform passive index funds.
Take time to read your 401(k) plan’s fee disclosures. Look for low-cost index funds or ETFs, which generally have better long-term performance due to fewer fees dragging them down.
4. Take Full Advantage of the Employer Match
If your employer offers a 401(k) match, for instance, 100% of the first 3% you contribute—that’s a guaranteed return.
It’s the closest thing to “free” money you’ll ever find in investment. But surprisingly, many employees don’t contribute enough to get the full match. That’s turning down a bonus every year.
Even if you’re tight on cash, contribute at least enough to get the match. It’s one of the easiest ways to boost your returns without doing anything extra.
5. Don’t Borrow From Your 401(k)
When life gets expensive, it’s tempting to borrow from your 401(k) because it seems like you’re just borrowing from yourself. But it’s riskier than it looks.
While you’re repaying that loan, the money you took out is missing out on market growth. Even worse, if you leave your job before repaying the loan, the balance becomes due fast, or it gets treated as an early withdrawal, complete with taxes and penalties.
Instead, build up an emergency fund outside of your 401(k) to cover surprise expenses. Keep your retirement account growing, untouched and uninterrupted.
6. Use a Roth 401(k) if Your Plan Offers It
Many employers now offer both a traditional and a Roth 401(k) option. Traditional contributions are pre-tax (you save money now), while Roth contributions are after-tax (you pay taxes today, but withdrawals in retirement are tax-free).
For younger workers or anyone expecting to be in a higher tax bracket later, Roth can be a game-changer. It offers tax-free growth and withdrawals, which is a huge perk if you’re playing the long game.
Consider splitting contributions between both types if your plan allows. It adds flexibility to your retirement tax strategy; something future you will appreciate.
7. Rebalance Your Portfolio Regularly
Life changes. Markets shift. And over time, your portfolio can drift from the mix you originally picked. Rebalancing means adjusting your investments to get back to your desired allocation, whether it’s 70% stocks and 30% bonds or something else.
If stocks surge, you might end up overweight in equities, which could increase your risk. Rebalancing helps you sell high and buy low, keeping your risk level where you want it.
Many 401(k) providers offer auto-rebalancing features. Turn that on, or at least check your allocations once or twice a year. It’s an easy way to stay on course.
8. Don’t Cash Out When You Change Jobs
It happens more often than you’d think: someone leaves a job, sees that 401(k) balance sitting there, and cashes it out like it’s bonus money. Big mistake.
Cashing out triggers income tax and a 10% early withdrawal penalty if you’re under 59½. Worse, it kills your compounding momentum, and that’s hard to get back.
Instead, roll it over into an IRA or your new employer’s 401(k) plan. That keeps your money growing and avoids the tax hit.
9. Avoid Chasing Market Trends
It’s easy to get caught up in headlines or the next “hot” investment sector. But making emotional, knee-jerk changes to your 401(k) based on market news is a recipe for stress and losses.
The most successful investors aren’t market timers; they’re long-haul riders. They pick a plan, stick to it, and resist the urge to tinker every time the market hiccups. Make your asset allocation based on your goals and risk tolerance, not Reddit threads or cable news.
10. Use Catch-Up Contributions If You’re 50+
If you’re age 50 or older, the IRS lets you contribute more to your 401(k); an extra $7,500 on top of the regular $23,000 limit. That’s \$30,500 total.
This is huge if you’re playing retirement catch-up. It’s like getting to hit the gas in the final stretch of the race and shave years off your worry timeline.
Even if you can’t max it out, putting in more than you used to can have a significant impact in your 50s and beyond. Time is still on your side, especially with a strong bull market.
11. Know the Vesting Schedule
Just because your employer matches your contributions doesn’t mean that money is yours immediately. Most companies use a vesting schedule, meaning you earn the right to keep those matched dollars over time.
If you leave too early, you could forfeit some (or all) of that match. This is one of those fine-print details they don’t highlight in your welcome packet. Before you make any job move, check the vesting rules. Staying six more months could mean an extra $3,000 in your pocket.
12. Don’t Rely on Your 401(k) Alone.
Your 401(k) is important, but it shouldn’t be your only retirement plan. Contribution limits cap how much you can invest, and you don’t always get the investment choices you’d find in an IRA or brokerage account.
If you’re able, contribute to a Roth IRA or taxable brokerage account on the side. Diversifying your investment vehicles gives you more flexibility with withdrawals, taxes, and strategies down the road.
Think of your 401(k) as the anchor, but build some sails too. You want your retirement plan to move forward from multiple directions.