VioletaStoimenova | E+ | Getty Images
Out of sight, out of mind. For many people, that’s how their employer-offered 401(k) plan works.
The employee chooses from a limited menu of investment options and, as long as the account continues a generally upward trajectory, the average investor has no reason to question their investment strategy nor any administrative fees associated with the plan.
In fact, studies have shown that the average investor is entirely unaware of the fees involved with their 401(k). TD Ameritrade estimates that only a meager 27% of enrollees understand what they’re paying for.
Whether you are mid-career or approaching retirement age, you want to get the most out of your money. If you’re going to be paying fees on your 401(k), you might as well make those fees work for you.
More from FA Playbook:
‘Investor alpha’ is the most important financial strategy for 2021
How to create a charitable trust as part of an estate plan
Here are 5 lessons the pandemic taught this financial advisor
If your employer’s plan allows it — and an increasing number do — it can be worth the investment to hire your own advisor. By doing so, you can put yourself in an ideal position to optimize your retirement plan and meet your overall financial goals.
While not every employer offers the option to hire your own advisor, a growing number of companies have embraced the trend. In fact, some 40% of all American employers give plan enrollees the choice of a self-directed brokerage account, which may include the ability to hire your own advisor.
Hiring a personal advisor has become so popular that some 403(b) plans now offer the option, as well. If you’re wondering if you can hire an independent advisor, too, the best way to find out is to contact your plan administrator to get the complete list of options.
More and more 401(k) plans offer an alternative to the traditional pre-selected list of investments. That alternative is called a self-directed brokerage account.
Some SDBAs allow you to hire your own third-party investment advisor — a fiduciary who works for you, not the plan, guiding your investment strategy following your wishes. By going the self-directed route, investors gain access to a whole new universe of investment options including mutual funds, exchange traded funds and à la carte stocks and bonds.
Given that nearly 40% of 401(k) plans now offer an SDBA option, one might expect to see a big adoption of the self-directed option. Participation remains low, however, because many people are not even aware of this option or know that they may be able to hire a personal advisor.
Those who hire their own advisor can expect to pay an advisory fee. Some plans allow that fee to be taken directly out of the participant’s 401(k) account. Typically, an independent advisor will charge anywhere between 0.5% to 1% of the total funds under management per year.
Don’t let these advisor fees scare you, however. In many cases, that price range is commensurate with what investors already pay under a traditionally managed 401(k). A fee of 1% is the industry average. For smaller accounts, that fee can be as high as 2%.
With an SDBA, your fees are likely to be on the low end of the industry average. In return, you’ll receive an exponentially increased level of value from your private advisor. In fact, a good advisor can add more than 3% value to you, according to several industry studies.
Professionals like doctors or lawyers might not have the time to manage their 401(k) portfolios adequately.
LumiNola | E+ | Getty Images
While hiring an independent advisor isn’t a one-size-fits-all financial solution, it is an advantageous choice for many people.
So, how do you know that the SDBA route is right for you?
The value and efficacy of retaining your own financial advisor depends greatly on your career and income level. Generally, the more assets you have, the wiser it is to employ a professional.
Likewise, professionals with demanding, time-consuming jobs, like doctors or lawyers, might not have the time to manage their portfolios adequately, nor do they want to leave it up to any old advisor as dictated by their employer. Advisors can also be a helpful asset for those who wish to elect an SDBA but do not have the investing savvy they need to successfully build their portfolio.
To figure out if the SDBA route is right for your needs, you need to determine your overall financial goals and then evaluate whether you have the time, resources, energy, and knowledge to manage your assets by yourself. If you find yourself lacking any of these critical factors, but still want to retain a wider range of options and a broader sense of control, hiring an independent advisor might be the best choice for you.
If you do decide to enroll in an SDBA, what benefits can you expect to see? The answer is access to a wider range of investment options, for starters.
A traditionally managed 401(k) plan has limited offerings, usually tucked into a curated set of mutual funds. An independent advisor opens the door to the full gamut of investment instruments like ETFs, individual stocks and bonds, and even non-traditional opportunities such as real estate.
Individual attention from an advisor diversifies your investment options and, given the potentially lower fees involved with an independent advisor, an SDBA gives you more bang for your buck.
As an ancillary benefit, the personalized insight provided by your own advisor helps you keep better track of your level of risk adversity and how it changes over time. A personal advisor can give your account the time and attention it needs to flourish, helping you meet your long-term financial goals.
The employer-managed 401(k) is a solid investment tool. There’s nothing wrong with it but, as your wealth grows, it’s in your best interest to examine the details of your current investment plan with a critical eye on performance, associated fees, and overall value.
For investors who want tailor-made investment choices or more aggressive financial options, but don’t have the time and energy to commit to the process, hiring an independent advisor is the best possible choice.
— By Renée Pastor, founder and wealth manager at The Pastor Financial Group