Should You Take Advice from Your 401k Provider?
John Rossheim | Monster Senior Contributing Writer
Are 401k Providers a Source of Good Counsel?
If your employer’s 401k provider does offer investment advice, should you trust it, given that the provider may be affiliated with, for example, some of the mutual funds the plan offers? The consensus is that substantial protections are built into the pension law, chiefly these:
• Investment recommendations must be made by an unbiased computer program.
• Advisory fees must not be linked to specific investments.
• The advisor’s sources of income must be transparent.
“I think the protections are sufficient,” McCabe says. “However, there will always be a very, very small minority of financial professionals who will break the rules.”
Also, if you’re seeking comprehensive, ongoing advice, you may not find a good alternative on your own. If you have less than $500,000 to manage, many advisors won’t work for a fee computed as a percentage of those assets, because it may not be profitable, Lange says. In those cases, advisors prefer to charge a commission or other fees that could bias their advice.
Does the Advice Come at a Reasonable Price?
If your employer’s 401k provider or a subcontractor offers to manage your investments for a fee of half a percent or less of your 401k account balance, you’re getting a reasonable value, according to industry insiders.
With third-party retirement-advice providers like Financial Engines and GuidedChoice, “you pay half a percent per year,” Roche says. “I think this will shrink to [one-quarter of a percent], and that is absolutely worth it.”
With these arrangements through your employer, you’ll likely be paying less than you would if you sought advice elsewhere. “All too often I see advisors who charge between 0.75 percent and 2 percent per year [with] results [that] constantly trail the market,” Schultz says.
Couldn’t you manage your own retirement investments? Sure, but individual investors have a poor record when it comes to long-term returns; they usually trail the annual returns of major indexes by several percentage points per year. If you’re a middle-class earner, that could easily add up to a difference of hundreds of thousands of dollars by the time you retire.
“Advice will now be available to everybody,” McCabe says. “But how many participants will take the proactive steps to use it? That remains to be seen.”
This article was originally published on Monster.com.