Is Any Advice Better Than None?
Workers who get virtually any type of investment advice for their 401(k) accounts do better than those who receive no advice, writes financial journalist Beth Pinsker in a recent post for Reuters.
And that advice can pay off big time.
The difference between advice and no advice can add up to more than 3 percent a year on investment returns, or up to 80 percent over 25 years, say benefits consultants Aon Hewitt and 401(k) advice provider Financial Engines.
Chris Costello, developer of a new online advice service, did market research by asking his own sister if he could take a peak at her 401(k) account. Like many retirement accounts allocated by do-it-yourself owners, “it was allocated badly, leaving her behind on her retirement goals,” observed Pinsker.
“In his sister’s case, she had put her funds in a money market account when the recession hit in 2008 and never moved them back into the market.”
“It’s been like four or five years of recovery, and she had made like $10,” said Costello.
“Do It Yourself” Retirement Savings
For most workers today, their 401(k) is their biggest savings account and their primary means of savings for retirement. If they mess it up, their retirement dreams just got that much further down the pike.
Unfortunately, “many of the 52 million workers who participate in 401(k)s are not good at making their own investment choices,” says Pinsker.
“Left to their own devices, people either do nothing at all or pick poorly,” says Christopher Jones, chief investment officer at Financial Engines.
Need Advice? Try Here.
Pinsker mentions several places to look for 401(k) investment advice, often for free. Here’s our take on the subject:
1. Pay an advisor to manage it. Most investment advisor firms, like ours, will advise existing clients on their 401(k) allocations as a courtesy at no additional charge, even though those accounts are not considered managed assets or subject to a management fee. Make sure you ask, though, because we have run into some firms that charge for the service.
There are other online services you can pay to advise you on your 401(k), and only your 401(k), for a reduced rate, many catering to certain industries and employees, like those directed at airline pilots. One caveat: some of the cut-rate online services aren’t bargains. You’re paying a lower fee than you would pay for personalized, comprehensive service, but you’re getting only a fraction of the services, making them a poor value.
2. Use a target date fund offered by the plan. Most plans offer target-date funds that start out with more stocks and become more conservative as you approach retirement. Once you are enrolled, they manage the investments and make all the changes for you. Some target-date plans are truly outstanding and very cost-effective, while others are over-priced and can lag the market. Unfortunately, you can only pick from what your company puts on the menu. Still, if you don’t know what you are doing, and don’t use an advisor, this is a great option.
3. Talk to Human Resources. Some companies provide free access to online advice services for employees. Check the guidance provided by HR or give them a call just to make sure you’re not passing up any freebies.
4. Do it yourself with online help. If you’re willing to use a little elbow grease, you can surf the web for investment allocation advice for someone your age, then implement the advice yourself. There are free allocation calculators sponsored by Bankrate, Vanguard, and CNN, among others. Most calculators take into account your age, risk tolerance, and time horizon to come up with a suitable mix of stocks, bonds and other assets. Once that’s done, however, you’ll need to translate that into buy and sell instructions based on the actual investments offered by your plan.
5. Complain. It’s easier to do in a small firm, but we’ve actually counseled some clients to complain to the powers that be about the lackluster investment choices in their retirement plans. Some plans are so horrid (like those commission-heavy 403(b) accounts foisted onto unsuspecting public-school teachers, or a few egregiously bad 401(k) plans opened by either misinformed or misled small businesses) that the best option is to not participate. Ouch. That hurts, but sometimes it’s the best option.