Funding your retirement has evolved over the past 30-plus years. It used to be you worked for an organization and upon retirement you earned a pension with lifetime monthly payments. However, with the advent of the 401(k), that has changed. Corporate pensions are rapidly going by the wayside and the responsibility for accumulating a retirement nest egg now rests squarely on our own shoulders.
For those who enjoy investing and who have an aptitude for it, this is a welcome challenge. Those who don’t like to make their own investment decisions may feel like they’ve been cast adrift without a life raft. There are, however, some tools and services that can help you manage your 401(k).
Services That May Be Offered by Your Plan
Financial Engines. Called by some the “original robo-advisor,” Financial Engines is offered by many 401(k) sponsors, and there are several versions of the service, some of which are free to plan participants and some of which charge a fee. Financial Engines was co-founded by Nobel Prize winner (for Economics) William Sharpe.
Essentially, the participant fills out a questionnaire and then Financial Engines establishes an allocation from among the mutual funds and other investments offered in the participant’s plan. Financial Engines is a registered investment advisor and provides their advice in a fiduciary capacity.
Variations of the service include taking into consideration your outside investments and providing advice on those assets. Financial Engines recently announced they would be hiring more live advisors for participants to speak with by phone and also announced they are purchasing brick-and-mortar financial advisor, The Mutual Fund Store. Plans have not been announced but it wouldn’t be surprising if 401(k) plan participants had the option of meeting with an advisor at these locations.
Other Advisory Services. Large retirement plan providers like Fidelity and TIAA-CREF offer advice services to their plan participants, and many plan sponsors provide access to advisory services similar to Financial Engines, from firms such as Guided Choice, Dimensional Fund Advisors (DFA), Morningstar and others. Additionally, some plans hire a financial advisor to work with participants who are seeking help.
In deciding whether or not to use a service of this type, plan participants should ask a number of questions, including:
- Is the service free or is there a fee?
- Understand their methodology for allocating your money. For instance, do their recommendations take your non-401(k) investments into account?
- What qualifications do the advisors (in the case of a live person) bring to the table?
- How does this service compare to using an outside financial advisor?
Robo-advisors are all over the news these days and are gathering assets rapidly. Most robo-advisors are not geared to handle your 401(k) plan, but there is at least one that is.
Blooom. A pure robo-advisor that handles only 401(k) accounts, Blooom is not affiliated with any plan provider. Their clients engage with them via their website and pay their fees directly. The cost of the program is $1 per month for accounts under $20,000 and $15 per month for plans with more than $20,000.
Users enter the investment choices offered in their plan. Blooom reviews the funds and recommends the best fund(s) consistent with the appropriate asset allocation for the participant. They tend toward lower-cost index funds where available. At this time Blooom does not take outside investments into account in making their recommendations.
Smart401(k). An independent fee-only service that provides advice to participants in 401(k), 403(b) and other defined contribution plans, Smart401(k)‘s advice is offered on a flat-fee basis.
They have helped more than 25,000 people in more than 10,000 company plans. Based upon a questionnaire, they come up with a plan for your investments. For ongoing members, they provide updates, and members can access an advisor by phone, email or online chat. The annual fee is $199.95, with a lower rate for participants in the government’s Thrift Savings Plan (TSP).
Target Date Funds and Managed Accounts
Target date funds (TDFs) are professionally managed accounts, invested with an eye toward reducing the allocation to equities as the time gets closer to the target date. For example, a 2030 fund assumes the person will retire in 2030. At retirement age the fund then moves into a glide path where the allocation to equities flattens out at some point, presumably until the investor’s death.
This all sounds good in theory, but in reality TDFs from different families with the same target date can vary greatly in terms of their allocation. Some TDFs simply use a weighted average of the underlying mutual funds as the expense ratio; others may tack on an asset fee for management.
Target date funds are offered by any number of mutual fund companies, including the “big three,” Fidelity, T. Rowe Price and Vanguard, which control about 75 percent of the total target date fund assets among them. These three fund families are also major providers of retirement plan platforms. Vanguard and T. Rowe Price have consistently attained the top ranking for TDF families from Morningstar on a regular basis; Fidelity generally ranks as average.
The Vanguard and T. Rowe Price funds have both done an excellent job and deserve their top rankings. As for other TDFs, 401(k) participants really need to understand how the funds invest, as well as the underlying expense ratios, before putting their money there.
Of note here, TDFs are the default option of choice for many 401(k) plans when a participant doesn’t specify where they want their money invested. It is important that you make a selection when participating in your company’s plan.
Other types of managed accounts are typically more risk based. The allocation is generally more static and may have descriptions like “conservative,” “moderate growth,” etc.
These may be offered as formal mutual funds or via the plan’s investment advisor, who constructs these portfolios from the open menu of investment choices offered.
An Outside Financial Advisor
If you work with a financial advisor, they should be advising you as to how to allocate your 401(k) money along with your other investment and retirement accounts.
For those who might not need a full-boat relationship with a financial advisor, there are options for hourly or as-needed advice, including advisors in the Garrett Planning Network.
If you are not comfortable, for whatever reason, making investment decisions with your 401(k) money, there are options available to you. You will need to be assertive enough to investigate and see which works best for your situation. In all cases, however, it is important to understand how the service works, the costs and expenses and most importantly if there are conflicts of interest that might taint the quality of advice that you receive.