Considering Professional Management of Your 401(k) - Five Ways Your Advisor Can Help
By Chris Hostetler
Happy National 401(k) day! Is this a totally made-up holiday? Of course! But every holiday got its start somewhere, and we as financial advisors are happy to contribute to your enjoyment of this one. Of course most people are not enjoying their 401(k) right now, with investment markets losing significant value thus far in 2022.
So what can you do to make the most of your employer retirement plan? You probably already know that you should be contributing at least enough to get any employer match, regularly reviewing your investment mix, and paying attention to the plan’s features and costs. But maybe you can do more.
One of the challenges with a 401(k), especially apparent during bear markets, is that the investment risk is on you, the employee. Sure, your employer does their due diligence on the investments available in your plan, but there may not be anybody watching your account or making adjustments to fit your plan.
The good news is there are ways to benefit from personalized professional management of your funds, without taking them out of your employer’s plan. (At Hilltop we use a technology called Pontera, which allows us to see your fund lineup and communicate trades directly to your plan.)
If you’ve built up substantial savings in your 401(k) or another retirement plan, professional management could provide significant benefits. Take a look at a few studies:
“In 2022, we believe the value of an advisor in the U.S. is approximately 4.91%.” – Russell Investments*
“Financial advice can add between 1.5% and 4% to account growth over extended periods.” – Fidelity Investments**
“Advisors can potentially add about 3 percentage points to your portfolio returns over time.” – Vanguard Investments***
We should acknowledge that these numbers come from studies with varying methodologies, and some include benefits that will only apply outside of a retirement plan (such as tax-efficient investing). Nevertheless, there are regular opportunities for your advisor to add value if he or she truly knows you and cares about your goals. Here are five ways an advisor can help:
Rebalancing during volatile markets – a big market drop can provide a chance to rebalance to out-of-favor asset classes, which could potentially help you earn higher returns when markets recover.
Professional fund evaluation – just a few aspects of diligent fund selection include the underlying fees, risk/reward characteristics, fund manager tenure, portfolio makeup, low correlation with your other investments.
Assessment of your risk profile – the amount of investment risk you have in your portfolio should reflect two things:
your time horizon, which can be measured somewhat objectively, and
your personal risk tolerance, which is admittedly more subjective but still very important.
Risk matching to your financial plan and other investments – say you have aggressive investments in your nonretirement accounts; you may want to dial it down in your employer plan. Conversely, you might plan to work long past the typical retirement age of 65. In either case, the standard age-based investment plan might not be right for you.
Behavioral coaching – less tangible but equally important to the other items on this list, an advisor can calmly help you manage the emotions that come with investing in volatile markets.
Despite these compelling reasons to let your advisor manage your plan, there are some important caveats. For one thing, you’ll probably need to pay your advisor, and the fee generally cannot be paid from your retirement plan (lest it be treated as a premature distribution). Additionally, your advisor is still limited to the funds offered by your plan – this may be a very short list, or it may be extensive.
As with so many financial decisions, the ideal path is different for everyone. If you’d like a review of your 401(k) (or other retirement plan) investments, please reach out to us. We’re always happy to discuss your options. Whether it makes sense for us to manage your portfolio or not, we will give you objective advice either way.
Studies cited:
* https://russellinvestments.com/Publications/US/Document/Value_of_an_Advisor_Study.pdf
** https://www.fidelity.com/viewpoints/investing-ideas/financial-advisor-cost
*** https://advisors.vanguard.com/iwe/pdf/IARCQAA.pdf
Disclaimers
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss.
Hilltop Wealth Advisors does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
This site may contain links to articles or other information that may be contained on a third-party website. Hilltop Wealth Advisors is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.
The information contained herein is believed to be true as of the date of publication. It may be rendered out of date by subsequent legal or tax-rule changes, as well as variable economic and market conditions.