Employees often make mistakes when it comes to how much they contribute to their 401(k)s. They might make poor investment choices or even mishandle funds. Here are three things you should avoid doing with your 401(k)
Overdose on company stock
It might seem like a good idea to own shares of your company's stock if your employer offers it as an investment option — and nearly 40 percent of plan sponsors do. But there are risks.
If you invest too heavily in your company's stock, your portfolio won't be diversified and will be too closely tied to the performance of one firm. If the company's performance tanks, your 401(k) balance is sure to go down with it.
Plus, some companies place restrictions on employees' ability to sell stock, limiting your control over your investments. Ideally, you shouldn't have more than 10 percent to 20 percent of your total investments in your company, according to the Financial Industry Regulatory Authority.
Bet on risky investments
The most common 401(k) investment choice is the mutual fund, which holds a variety of stocks and bonds. However, some plans let participants buy an assortment of securities through a brokerage account.
Unless you're experienced, you probably want to leave the stock picking up to the pros. This means you might want to stick with mutual funds. However, you still need to be careful when choosing funds. You don't want to take on too much risk by investing only in stock funds. Even the youngest 401(k) plan participants should still allocate 10 percent of their portfolio to bonds, said Jean Young, senior research analyst with the Vanguard Center for Retirement Research.
Avoid stocks altogether
According to a report conducted by Vanguard, 5 percent of participants in Vanguard-administered 401(k) plans don't have any stock holdings in their accounts. This is a mistake even for investors with low risk tolerance or those close to retirement.
Because most people expect to live 20 to 30 years beyond their retirement date, they need the higher rate of return as a hedge against inflation, Young said.
Cameron Huddleston writes for GOBankingRates.com.