02/29/2012 05:26 pm ET Updated Mar 05, 2012

How To Manage My 401(k)

Planning for retirement starts with your 401(k) -- a retirement savings account typically provided by your employer.

401(k)s are "tax deferred," which means the money going into the account as well as interest gained is not taxed until the funds are withdrawn in retirement. This allows "money to grow faster than it would if it were in a taxable account," says Thomas Di Lorenzo, a manager of Employee Financial Services at Ernst and Young.

"A 401(k) in and of itself is no guarantee that you will meet your retirement goals," Di Lorenzo said. But it's a good start.

The bottom line when it comes to managing your 401(k)? Treat your fund like a plant. Sow the seeds early and give it time and room to grow. Don't be skimpy when it comes to watering your plan(t). And don't pick its fruit too soon. Your plan(t)'s sweetest and juiciest fruit will only be ripe for the picking once you've reached retirement age.

Below are some common mistakes many of us run into managing our retirement plans.

1. You're Not Contributing At All

Put simply: the biggest mistake you can make regarding your 401(k) is not contributing to one at all. Putting money into a 401(k) lowers your annual taxable income, meaning that Many employers match employee contributions up to a certain amount, too -- this is essentially free money that is not taxable.

2. You Started Too Late

Start investing young -- it'll be worth it in the long run. reports:

Let's say you invest $200 a month beginning at age 25, and you earn 7 percent annually on that money. By the time you turn 65, you will have about $525,000 saved up. If you wait until you're 35 to begin saving, assuming the same monthly investment and rate of return, you'll have amassed less than half that amount -- about $244,000.

3. You're Not Putting Away Enough

Di Lorenzo advises clients to contribute the maximum amount that your employer will match.

That said, if you can't afford to be putting money away, don't.

"You can only save what you can afford to save," Di Lorenzo said. "You don't want to see yourself in a situation when you're incurring debt trying to save for retirement."

4. You're Withdrawing From Your 401(k)

The money set aside in your retirement account is a tempting pile of cash that's especially tempting if you've fallen upon tough times. While withdrawing from your 401(k) is possible, it's typically advised against because it comes with steep fees: the money you withdraw will be taxed at your income tax rate and you'll also be charged a 10-percent penalty.

5. You're Too Conservative With Your Investments

Young investors should have riskier portfolios than their older counterparts, simply because there's more room for those risky investments to grow. A growing number of our retirement plans are target date funds, which automatically allocate assets based on your age and when you plan to retire. In these funds, younger investors find more of their money in stocks, while older investors who are closer to retirement have their money invested in more stable assets, like bonds. But these funds are not fool-proof and they tend to cost you more in fees. Don't be blind to market forces and be cognizant of your fund's performance.

6. You're Ignoring Your Account

Savvy investors don't ignore their 401(k)s. They reallocate. The vast majority of us, however, never touch our allocations.

"It is recommended that you rebalance or revisit your portfolio on a regular basis at least once a year," says Di Lorenzo, who encourages clients to look at their investments when they receive quarterly statements for their funds.

According to, the following events should cause you to rethink how your retirement funds are allocated: market swings, negative news about your company, marriage and divorce, how much time you've got before you plan to retire and if the plan itself changes.

7. Your Fund Is Costing Too Much

Chances are you don't know how much your 401(k) plan is costing you. Most people don't. But there are a number of fees that get skimmed of the top of your contributions to your 401(k) and are paid to Wall Street to manage your account. You'd be doing yourself a favor to learn a bit more about how much you're spending on your retirement plan.

The good news: In May 2012, 401(k) contributors will begin receiving quarterly statements that breakdown their contributions, highlighting how much money is being extracted in fees and what the money is being used for.

8. You're Not Rolling Your 401(k) Over When You Start A New Job

With a new job comes a new retirement plan. While your old one won't disappear, it may become increasingly difficult to oversee multiple plans as time goes on. Rolling your plans into one won't necessarily grow your money faster, but it will make it easier to keep tabs on your asset allocations.

Correction: An original version of this story incorrectly stated that there is a penalty for borrowing from you 401(k). In fact, a 10 percent penalty is enforced when one withdraws money from a 401(k).