Blame it on the media, blame it on your neighbor. Many investors have the wrong idea when it comes to choosing mutual funds in their 401(k) plan. Assuming you already understand the importance of investing in your 401(k) plan, I'd like to save you from a few common 401(k) investing pitfalls:

Diversify

It's true - mutual funds do offer diversification. Academics preach to us that diversification is key when it comes to investing. However, don't stop there. Just because your company was smart enough to offer mutual funds in your 401(k), doesn't mean you should load all your retirement money into one fund. Diversify between the different types of mutual funds.

Avoid Stocking Up

Many publicly traded companies offer their own stock in the 401(k) plan. As Enron and other companies that went out of business proved, investing in your company stock can be dangerous. Investing primarily in your company's stock isn't an act of loyalty, it's an act of stupidity. Just by being an employee of a particular company, much of your financial situation is invested in the company. If the company goes belly-up, it would be a shame for you to lose both your job and all your retirement savings. It's okay to hold some company stock (especially if you get it at a discount), but it should only be a small portion of your portfolio, no more than 10%.

Size Does Matter

No, this isn't a "Viagra for your portfolio" offer, but when it comes to investing, size does matter. Over the long-term, small company stocks out-perform large company stocks. Most investors concentrate their portfolios on large-cap growth funds, like the S&P 500, partly because S&P 500 tracking mutual funds are the most common 401(k)offering and because the S&P 500 gets a lot of attention in the press. The S&P 500 does have a place in your portfolio, but so do small company stocks.

Think Globally

A common mistake for investors is to invest only within the U.S. borders. This act of patriotism may be costing you a percent or two in returns each year. Next time you are on the road or in your medicine cabinet, look around - it's a global economy! By investing a portion of your account internationally, you add another level of diversification, plus it helps protect you from a weak American dollar. You should consider investing 30 to 50% of your money internationally, depending on the variety of international options in your plan and your own comfort level.

What's on the Outside Counts

If you are making investments outside of your 401(k), take a look at all of your investments as a whole. You can use your 401(k) to your advantage. For example, if you want some of your money to be in aggressive investments, it is tax advantageous to buy them in your 401(k) plan, especially if it involves frequent trading. Buying and selling in your 401(k) is not a taxable event, plus it saves you a paperwork headache when trying to figure out your cost basis. Note: some plans do not allow frequent trading.

You can also think of it the other way around. If there is something you really want to buy in your 401(k), but your employer doesn't offer it, you can use your non-401(k) portfolio to purchase it.

Hidden Fees

Most employers do a good job of insuring that their 401(k) plans are free of unnecessary fees, but not all. Make sure that your mutual fund choices are no-load mutual funds, meaning they don't cost you a percentage to get into and get out of. You'll also want to make sure you are not being charged 12b-1 fees. Another place to look for hidden fees is the internal expenses of the fund, measured by the expense ratio. If you have the choice between two large growth funds, for example, and one charges 1.3% in internal expenses and one charges 0.3% in internal expenses, go with the latter. It is highly unlikely the first fund will beat the 2nd one by 1% a year to make up for its high costs, especially when it is in the same investment category.

All these hidden fees should be spelled out in each fund's prospectus, but you can look online at Morningstar.com or Yahoo.com if you know the ticker symbol of the fund (a five letter combination, usually ending with "X"). In particular, look for the lines labeled "expense ratio," "front-end sales load," "back-end sales load," and "12b-1 fee." There's no need to pay any of the loads, but the expense ratio is necessary, though it can be minimized. Note: some plans have funds that are not publicly available.