How to Make Smarter 401(k) choices

Avoid these five mistakes to build a healthier nest egg.

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It's easy to blame a paltry retirement fund on the volatile market, but consumers also make plenty of mistakes on their own that cost them tens of thousands of dollars before they reach retirement age. Here are five common pitfalls to avoid:

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Lack of information. An ING DIRECT survey found that almost half of Americans have "no clue" how much money they need to retire. And according to a recent report by the Transamerica Center for Retirement Studies, only 1 in 10 people does any sort of calculation at all. That might help explain why, on average, Americans are on track to replace less than 60 percent of their income during retirement—far below the recommended 80 percent.

Part of the problem seems to be that people believe they can't find information for free. A Fidelity survey found that 8 in 10 Americans haven't sought financial help in the last year, largely because they feared it would be too expensive or that it was only for wealthy people. In response to that finding, Fidelity launched an outreach effort that includes free seminars and online information and saving planners.

There are also dozens of helpful retirement calculators online available at no cost. The best ones ask the user to fill in many variables, including expected rate of return, life expectancy, expected inflation rates, and desired replacement income. Many financial advisers recommend experimenting with a variety of rates of return, from a conservative 5 percent to a more optimistic 8 to 10 percent.

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Failing to avoid high fees. Fees on retirement account mutual funds can sap thousands of dollars away from nest eggs. They're often buried away in paperwork, but new research suggests that even if consumers know about the fees, they're not good at avoiding them. A RAND study asked more than 1,000 participants to invest money in funds carrying different fees. One fund was clearly the best; it offered the lowest annual fees, as well as the lowest sales commission charge (also known as "load"). All of the funds were S&P 500 index funds, so they would produce equivalent returns.

But only half of the people selected the lowest-fee fund. In fact, one-third put their money in the most expensive fund. They were, in other words, effectively throwing money away. The researchers, Angela Hung and Joanne Yoong, don't know exactly what caused such poor decision-making, but they suspect it has to do with financial literacy. The people who had greater financial literacy skills (they understood compound interest, for example), were more likely to do better at choosing the lowest-fee fund.

Relying on bad assumptions. The RAND study also found that investors tend to rely on faulty "rules of thumb" when making investment decisions that lead them astray. For example, they tend to hold a limited range of equities, focusing on company stock, for example, which can doom their savings if the company collapses. They also tend to make their investment decisions once and then stick with them, rather than adjust them, even though financial advisers recommend shifting into more conservative investments as investors approach retirement. ING DIRECT found that two-thirds of Americans haven't made any adjustments in their investments in response to the financial crisis.

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Getting overwhelmed with information. One might assume that investors making bad decisions just need a little extra information to point them in the right direction. But the RAND study also found that more information, in the form of a graph showing the effect of fees, actually resulted in poorer decision-making, especially among those with low financial literacy scores. The researchers believe that participants may have felt overloaded with information.

Relying too heavily on 401(k)s alone. Tax-protected retirement accounts, including 401(k)s and 403(b)s, should be just one of three parts to a retirement plan, says the Women's Institute for a Secure Retirement. The other two are personal savings and Social Security. It's that first one—personal savings—which often gets forgotten, partly because people find it difficult to save any money beyond their employee-sponsored programs. Relying exclusively on Social Security, as ING DIRECT found 1 in 5 Americans were doing, is just as problematic, since most people's Social Security checks alone don't provide for a comfortable retirement.