Here are the biggest 401(k) mistakes each generation makes

The 401(k) has been around for 46 years, and since then it has become the leading workplace retirement plan that employees of all ages use to save for their future. Despite this, many still don’t understand all the ins and outs of their plan or the best strategies to help them maximize the growth of their savings.

Every generation has made its share of 401(k) mistakes. The good news is that, for many, there is still time to correct these mistakes. Here are the biggest problems each generation has faced, based on a recent Fidelity survey, and how to fix them.

Baby boomers: don’t adopt the Roth 401(k)

Baby boomers saw the first 401(k)s in 1978, and most have stuck with these traditional plans to the present day. There’s nothing wrong with that. A traditional 401(k) can still be a good retirement plan, especially for those who expect to be in a lower tax bracket in retirement. By delaying taxation until you withdraw your savings in retirement, you could save money.

But Roth 401(k)s can also have a place in a retirement plan. You fund these 401(k)s with after-tax dollars, so you pay taxes on your contributions this year. But it allows you to withdraw the money tax-free in retirement, provided you’re at least 59½ and have had the 401(k) for at least five years at that point. If you qualify for a 401(k) match, these may also be after-tax funds, but more often than not, they are pre-tax.

Roth 401(k)s have only been around since 2006, which might explain why only 12% of baby boomers currently contribute to them. Many baby boomers are in or already past their peak earning years, so traditional 401(k)s may be more beneficial to them than Roth 401(k)s, which would require them to pay taxes upfront on their contributions.

Another problem could be the lack of availability of Roth 401(k)s. They have become increasingly common, but many employers still do not offer them to their employees. If you want a Roth account, you may need to open a Roth IRA yourself at a brokerage.

Generation X: 401(k) loans

A 401(k) loan is often a smarter play than an early withdrawal, which triggers income taxes, plus a 10% tax penalty if you’re under age 59½ at the time. These loans allow you to repay what you borrow with interest and you don’t need a credit check to do so. As long as you repay your loan on time, the government will not consider this a distribution.

That could make 401(k) loans attractive to Generation X workers, many of whom are pressed for money as they try to financially care for their aging parents and children. More than a quarter of Gen Xers currently have an outstanding 401(k) loan, according to the Fidelity survey. But while these loans can be convenient, they can also pose a threat to your retirement security.

If you leave your job or are laid off, your entire loan balance becomes due at once. The IRS considers any portion of the loan that you do not repay on time to be a distribution and taxes you accordingly.

Even if you manage to make all your payments as planned, you’ll likely end up with a lower balance than you would have had if you had simply left your money in your 401(k) instead of taking out the loan. This may not always be possible, but it’s best to pursue other types of credit when you need additional cash and consider 401(k) loans as a last resort.

Millennials and Generation Z: Not saving enough and investing exclusively in target date funds

New entrants to the workforce, millennials and Generation Z are finding themselves facing similar challenges with their 401(k)s. The biggest problem is their savings rates. The Fidelity survey found that millennials save an average of 8.6% of their salary, while Gen Z workers save 7.6%. When you add each generation’s average 401(k) match of 4.6% and 3.8%, respectively, you get a contribution of 13.2% for Millennials and 11.4% for Gen Z.

These numbers aren’t bad, but ideally they would be a little closer to 15%. But given that many people in these generations are saddled with mountains of student debt, saving anything at all is an accomplishment to be proud of. As their salaries increase, they will hopefully be able to increase their savings rate accordingly.

The other thing millennials and Gen Z need to take a closer look at is what they are investing in. More than 70% of millennials and 82% of Gen Z said they invest exclusively in target date funds. These funds are perfect for those who want to invest hands-off. But that’s not always your best option.

Target date funds can have high fees that eat into your profits over time. It’s worth exploring your other investment options before defaulting to one of them. For example, if you have access to an index fund, this could help you grow your wealth while keeping fees to a minimum.

If you’ve made any of the 401(k) mistakes above, it’s no big deal. Unless you’re planning to retire in the next few months, you have time to fix it. Determine what changes you want to make for 2025 and implement them as quickly as possible.