Should You Seek Investment Advice On Your 401(K) Account?

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For most Americans, 401(k) plan accounts have become the predominant retirement savings vehicle.  Currently, more than $6.4 trillion is invested in 401(k) plans across the country, a 73% increase in the past ten years.1  An additional $2.7 trillion is invested in other defined-contribution plans, such as 403(b) plans for educational or non-profit organizations.1

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Investment Advice For Your 401(K) Account

The vast majority of retirement plan participants do not consider themselves expert investors, nor do they want to take the time to manage their investments. Investors who want some level of professional advice on investment selection have a few basic options:

Target-date funds and balanced funds

Target-date funds are by far the most popular “do-it-for-me” approach, with 78% of 401(k) plan participants opting in2 —even though the average 401(k) plan offers 28 investment choices.1 Balanced funds are similar except with fixed allocation percentages rather than percentages that change over time.

Managed accounts

Some 401(k) plans offer a managed account program, in which an investment advisor serves as a plan fiduciary and provides tailored advice to participants based on their age, risk tolerance, time horizon and other personal factors. Managed account programs may or may not include financial planning services outside of the retirement plan, offering a more holistic view of an employee’s financial picture. These services clearly offer a more customized investment solution to participants, compared to target retirement date funds, but they come at a cost. Because of the advisory fee and perhaps a lack of understanding, only about 5% of participants used a managed account program.2

Professional advice from a financial advisor not associated with the plan

Many investors work with a financial advisor but keep their retirement accounts separate. That is, the advisor is aware of those assets but not charging fees to manage them. Implicitly, this means plan participants either believe they can manage their own investments or are satisfied with the “do-it-for-me” products offered by their 401(k) plan.

Why pay an advisor not associated with a plan?

Advisors typically charge between 0.5% and 1.0% of assets to provide ongoing financial advice.This may seem like an unreasonable charge to some; however, evidence indicates that net investment returns can be increased by up to 3% per year.4

Many people might think that professional investment advisors have an edge over the average investor because they follow the global markets on a daily basis. However, the information advantage is not the primary reason why net portfolio returns are higher when using an investment advisor. Research conducted by Vanguard over the past 15 years indicates that the real value (referred to as the “Advisor’s Alpha”) of retaining an investment advisor is through relationship-oriented services such as comprehensive wealth management, financial planning, discipline, and guidance.

Specifically, good financial advisors develop tailored asset allocation and diversification strategies, cost-effective implementation, and disciplined rebalancing. However, the most “alpha” is generated by asset location (for example, which investments should be in taxable vs. tax-deferred accounts), spending strategies (order of withdrawal), and behavioral coaching. In fact, behavioral coaching has been found to be the most valuable service that financial advisors can offer to their clients. Keeping an investor’s fears, doubts, and emotions in check during turbulent market or economic conditions is the key to long-term investment success. The best financial advisors keep their clients calm and provide the disciplined, fact-based guidance that investors sorely need during tough times.

Behavioral coaching and investment discipline cannot be discounted. In a Vanguard study, the personal performance of 58,168 self-directed Vanguard IRA investors was analyzed over the five-year period ending December 31, 2012…a very volatile time in the markets. Investors who made even one exchange over that entire period trailed an applicable benchmark by 1.50%.4 That may not sound like much, but that difference represented a rate of return nearly 8 times worse than the benchmark. Another recurring study, by Morningstar, has shown that investors typically generate personal returns much lower than the very funds they invest in, due to behavioral biases.5

Taking all that into account, here are some guidelines to consider:

  • People who enjoy following investments and have the expertise and time to devote to a disciplined investment strategy can choose from the wide variety of funds available in most 401(k) plans.
  • Young people who have no investment experience, are just starting their retirement savings journey and have no other investment accounts would be well served by choosing a target retirement date fund that most closely matches their expected year of retirement or a balanced fund that matches their risk tolerance. Many young people are interested in investments that consider environmental, social and governance (ESG) factors. If ESG funds are not available in the 401(k) plan, participants should ask their employer for them.
  • People who would like help with retirement planning and who would be more comfortable knowing that an expert is overseeing their account could consider a managed account solution, if offered through their 401(k) plan. Note that many plans do not offer this option.

Families with more complex financial situations and multiple accounts should consider the personal services of a qualified independent financial advisor to manage their entire portfolio, including their 401(k) accounts. For high-net-worth individuals who have significant investment assets outside of their employer’s retirement plan, an investment advisor can help coordinate an overall asset allocation/asset location strategy and may also offer other valuable services such as consolidated performance reporting.

As an investment advisory firm that serves as a consultant to retirement plan sponsors, and as a financial advisor to individuals, Riverwater Partners believes many investors could benefit by seeking advice for their 401(k) account, but the potential fit is dependent on each person’s unique situation.

Article By Greg Wait, Riverwater Partners, LLC

1 BrightScope/ICI Defined Contribution Plan Profile; August 2020.

2 Vanguard, How America Saves: 2020.

3 Consumer Reports, New Rules for Financial Advisors; March 29, 2018.

4 Vanguard, Putting a value on your value: Quantifying Vanguard Advisor’s Alpha; February 2019.

5 Morningstar, Mind the Gap: 2015.

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