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 falling 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. But for those of us who are doctors, lawyers or teachers or who just want to focus on our careers, being passed the baton to manage our retirement can be overwhelming.
But don’t worry — there are lots of tools available to alleviate the stress and make sure you’re on track.
A robo advisor is an online service that provides automated, algorithm-based wealth management advice. Unlike a financial advisor, a robo advisor is not a human but instead a computer managing your money. Does that sound crazy? Welcome to the future of investing.
The truth is, if you are a person who doesn’t have the time or desire to learn retirement planning basics, a robo advisor is an excellent choice. It’s simple — just sign up. The platform will ask you a few questions and then walk you through an incredibly easy and painless approach to getting your retirement ducks in a row.
From our research, Wealthfront is currently the best robo advisor. Their fees are among the lowest, and the service has the functionality to help plan for your retirement. We’ve been able to work out with Wealthfront an exclusive promotion by which you can get the first $15,000 managed for free. (Normally it’s only the first $10,000.)
401(k) Fee Analyzers
Since most robo advisors don’t cover company-sponsored retirement plans (typically, 401(k)s or 403(b)s), I recommend checking out the tools that can help you understand and manage these investments. As we discussed in “Is your 401(k) Plan Good or Bad?,” the basic information you need to learn is what fees you are paying and where your money is invested.
There are a dozen ways to uncover the fees you are paying in your retirement account. And since the banks are unlikely to make that an easy task, companies have been created just to solve this problem.
These are the easiest fee analyzers to use (and all of them are free):
- Blooom. Right now with Blooom get your first month for free.
- Personal Capital. Check out their Investment Checkup tool to see if your asset allocation and 401(k) fees are too high. For most, the amount of fees you pay will shock you.
- America’s Best 401k. They not only can analyze your 401(k) plan, but they’ll actually set you up with the next steps and reports you can share with your HR department.
Services That May Be Offered by Your Existing 401(k) Plan
There are companies out there that partner with 401(k) and 403(b) sponsors (your company) and offer guidance to employees. Check with your HR department to see if your company has partnered with any such organization.
One example is Financial Engines. The company was co-founded in the late 1990s by Nobel Prize winner (for Economics) William Sharpe. Here’s how it works: The employee fills out a questionnaire and then Financial Engines takes that information to make the best choices for their situation. As an employee, you will have access to live advisors to ask questions, and if something dramatic should change in your life, you can call Financial Engines and they will adjust your portfolio accordingly. It’s an excellent service that I wish more sponsors would offer their employees.
However, if your company doesn’t partner with Financial Engines, large retirement plan providers like Fidelity and TIAA-CREF also offer advice services to their plan participants. You just need to find out from your HR.
Ask these questions before using this type of service:
- Is the service free, or is there a fee?
- Do I understand their methodology for allocating my money? For instance, do their recommendations take my 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?
Target Date Funds
A more popular approach to many 401(k) plans is to offer Target Date Funds (TDFs). These funds 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% 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.
- Search for the ticker symbol in your 401(k) or 403(b) report.
- Visit Google Finance and enter the ticker into the search bar.
- Read the description of your retirement account. If it’s a target date fund, you’ll know that over time the allocation will change according to the date they expect you to retire.
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 making investment decisions with your retirement plan — for whatever reason — 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 the advice that you receive.