Need a Guru for Your 401(k)?
One day soon your company is likely to let you turn your account over to a professional adviser. Should you?
(MONEY Magazine) – Anyone who has ever felt overwhelmed or confused by the proliferation of 401(k) fund choices—and who hasn't?—is going to love the latest addition to the retirement plan menu: advice. In addition to providing booklets, websites and software to help you manage your money, employers are increasingly offering the simplest option of all, which is to let someone else do it. Today about 22% of 401(k)s and other defined-contribution plans make investment managers available, up from 14% two years ago. Within five years, industry experts predict, most will.
Professional help, of course, comes at a cost. So before you opt in, consider these five key questions.
How does it work? When you sign up for a managed 401(k), your plan provider—Fidelity, say, or Vanguard—turns your money over to an outside investment adviser. (That's to prevent conflicts of interest; the U.S. Labor Department worries that otherwise the plan provider might steer you into its own funds.) Vanguard has teamed up with Financial Engines, Fidelity is working with Ibbotson Associates, and both Wachovia and T. Rowe Price have partnered with Morningstar.
Signing up can be as simple as checking off a box—or as complicated as filling out a detailed questionnaire about your investing goals, your ability to tolerate the market's ups and downs and what else you and your spouse own. Based on the information you provide, the adviser will put together a portfolio of funds from your 401(k) that's tailored to you—and then keep it on track.
What's a fair price for a managed account? The fees vary widely—typically from 0.2% to 1% of your assets. That's on top of your regular 401(k) expenses. Says benefits consultant Ted Benna, who designed the first 401(k) plan: "If you can get a better return in a managed account than outside of one, the fees may be worth it." Obviously, the odds of success decrease the higher the fees go, so think twice about managed accounts charging more than 0.3%. If the advisers working with your 401(k) do charge more than that, complain to your plan's administrator. Competition should be driving the cost down.
Will a managed account give me better results than I would get on my own? The answer depends on how well you're doing now. Fact is, most 401(k) investors could use some help. A survey by benefits consultancy Hewitt Associates found that only one in six employees made any transfers in their accounts last year or in 2002, which means that very few really managed their portfolios. A pro would avoid that mistake. By periodically shifting money from your hottest funds to those that have lagged, an adviser would maintain your desired asset mix and lower the risk that you'd get badly hurt if your hot picks cooled.
Many employees also tend to concentrate their 401(k)s in too few investments. Roughly a third hold just one or two funds. "People are making big mistakes with their plans all along the way," says Boston College professor Alicia Munnell, co-author of Coming Up Short: The Challenge of 401(k) Plans. But if you already own half a dozen funds of different types and you regularly rebalance your money among them, a pro may not be worth the extra cost.
How personalized is the advice? Someone who simply checks off a box on a form will end up with a default portfolio, not unlike a so-called target-date retirement fund—that is, a fund that automatically shifts to more conservative investments as you approach retirement. If you have the option to submit detailed financial information—and you likely will—do it. The more data you provide, the more customized a portfolio you'll get.
For example, Morningstar's standard asset mix for a 40-year-old woman earning $100,000, with $100,000 in her plan, is 57% stocks, 36% bonds and 7% cash. But if she reports that her husband stashes 100% of his $150,000 401(k) in stocks, her mix might shift to 35% stocks, 54% bonds and 11% cash so that the couple's combined portfolio isn't overloaded in equities.
Financial advisers warn that stashing more than 10% of your 401(k) in your employer's stock is too risky. (Remember Enron? If your company runs into trouble and the stock plunges, you could lose both your job and your savings.) But if you have company stock in your plan, you will probably have to decide for yourself how much to keep. Advisers take different approaches to this issue. Morningstar's policy is to unload the entire stake unless the employee says otherwise or the employer requires employees to hold shares. By contrast, Fidelity won't sell unless you say so.
Are there cheaper ways to get help? If you're just starting out in a 401(k) or don't have any other investments, you may be better off in a target-date retirement fund, which will provide a diversified portfolio at a lower cost. If you have a large 401(k) balance—say, six figures or more—it might be cheaper to hire your own financial adviser, who could give you truly personal advice for $150 to $300 an hour or a flat fee of several thousand dollars. In the meantime, check out your plan's online asset-allocation tools and retirement calculators. These days it can be surprisingly easy to manage your own 401(k) wisely—for free.