Many financial institutions and advisors would be happy to manage your 401k account once you have left employment. You will be charged for this service. Ask yourself if the cost is worth it.
Advisors often charge a percentage of assets under management. The average is 1 percent per annum. This charge is usually added to any investment expenses associated with mutual funds or the transaction costs for trading individual securities. It seems so small that it doesn’t make much difference. Wrong!
Let’s take a look at an example to show how much you will be spending if you pay 1 percent on your assets.
Let’s say you are just retiring and you have $500,000 in your retirement 401(k). This is the minimum amount that many advisors will accept to take your business. Let’s say your advisor charges 1 % per annum and invests in low cost mutual funds at 0.25 percent per annum (that’s 25 basis point in investing jargon). In this scenario, your total costs are 1.25 percent per annum or 125 basis points.
Let’s say you were employed by a large company that provides low-cost mutual fund plans in its 401(k). In this scenario, you could have left your accounts with the former employer. Let’s say your employer offers low-cost mutual funds in its 401(k) plan. In this scenario, your total cost would be 25 basis points.
Even if you don’t have a 401(k), plan that offers low-cost funds for your investments, there are still funds available at Vanguard, Schwab, Fidelity and Schwab. These index funds offer charges around 10 basis points.
Let’s now assume that your investments earn 5% per year before expenses. Let’s look at the money you will have accumulated over 10 years in these two scenarios. Assuming you did not make any withdrawals.
This example may be criticized by financial advisors who might argue that it is unfair. They can increase your rate of return by adding value if you choose to invest with them. This argument has a problem. There is a lot of evidence that active managers don’t outperform benchmark indexes over the long-term. After all costs are considered, it is a stretch for active managers to claim that they can beat low-cost index funds in large employers’ 401(k).
Financial advisors are also valuable in many other ways. They can help you decide how much risk you should take in your investments. They can also help lower your taxes. These are just some examples. There are many others.
Could you afford to buy this help for $70,000 per year? Are they required to be paid every year?
Let’s say you pay $300 an hour to a financial advisor. This is probably the highest rate. Let’s say you need to meet with the advisor for 10 hours each year to discuss your financial situation. The annual cost would be $3,000 or $30,000 over 10 year.
You would need to spend 233 hours in order to rack up $70,000 in charges in 10 years. This is unlikely unless your situation is very complicated, in which case, you may be getting good value for the money.
If:
Let me give you an example: The Federal Thrift Savings Plan for government employees provides investments at average costs of 2.9 basis point. It would be foolish for most government employees to transfer money from the TSP, as it is one of the best deals available.
However, I have seen plans for 401(ks) that are offered by smaller employers with fees of up to 150 basis points. This is why it’s a bad idea for most people to put their money into the plan.
You can save thousands of dollars even if your savings are less than $500,000 by lowering the fees that you pay for investments. If you had $100,000 instead of $500,000 savings, you could save $14,548 over 10 year by paying 25 basis point instead of 125 basis points.
What can you do if your employer offers financial advice but you want to keep your money in the plan? There are a few things you can do.
There are financial advisors that charge an hourly rate, such as the Garrett Planning Network. Many 401(k), plans now offer professional advice through services such as Financial Engines at a fraction of the cost of retail advisors.
A few percentage points can make a huge difference over the course of your life. Before you decide what you do with your money, it’s important to calculate the cost of your 401(k), and then compare that figure to the costs of any financial advisors or institutions you are considering investing with. This shouldn’t be difficult since all 401(k), plans must now disclose the fees for their funds.
It is common American common sense to inquire about the cost of services rendered. This will ensure that you get the most for your hard-earned money.
