Here's How to Avoid Sabotaging your 401(k) Plan

Your front porch sags, your kitchen is the size of a broom closet, and you can't run the vacuum and the dishwasher at the same time without blowing a fuse. You'd love to buy a nicer house, but given the wretched state of the housing market, you're probably stuck with the house you have.

See also: AARP's 401(k) fees calculator.

If you're like most workers, you're in the same position with respect to your retirement savings plan. Sure, it would be nice to have a traditional pension that delivers a monthly check until the day you die, but hardly anyone has one of those anymore. Instead, most of us have a 401(k) plan, which requires more maintenance than a traditional pension.

Unfortunately, a lot of us neglect our 401(k)s, or make decisions that could erode the value of our plans. How to preserve your savings:

1. Don't treat your 401(k) like a benevolent banker.

In 2010, nearly 28% of plan participants had an outstanding 401(k) loan, a record high, according to Aon Hewitt, a consulting firm. That's not surprising: Current interest rates on 401(k) loans are typically below 5%, you can get one without a credit check, and when you repay the loan, you pay interest to yourself.

But there are drawbacks to these loans, too. If you leave your job, you'll have to repay the entire balance, usually within 60 days, says Pamela Hess, director of retirement research for Aon Hewitt. Otherwise, the IRS will treat the loan as a distribution, which means you'll owe income taxes on the entire amount, plus an early withdrawal penalty if you're under 59½. This happens quite frequently: Aon Hewitt estimates that nearly 70% of plan participants who leave their jobs with outstanding 401(k) loans end up defaulting.

Convinced you won't lose your job any time soon? Borrowing from your 401(k) could still jeopardize your retirement if you stop contributing to your plan while you're repaying the loan. Workers who stop contributing for five years — the typical maximum term for a 401(k) loan — could reduce their retirement income by 10% to 13%, according to an analysis by the Employee Benefit Research Institute. The reduction nearly doubles for workers who take out two loans, EBRI says.

2. Carefully consider the pros and cons of rolling over a former employer's 401(k) plan to an individual retirement account.

A survey by Fidelity Investments found that only 30% of participants in Fidelity 401(k) plans moved their money out of their plans within four months when they changed jobs.

While there are lots of good reasons to leave your money in a former employer's 401(k) plan, "I'd rather go bowling" isn't one of them. If you fall victim to inertia, you could lose track of what's happening to your money, says Sarah Walsh, vice president for the retirement products group at Fidelity.