Many people do not realize that they are paying for advice when they contribute to their companies 401(K) because they don’t see a separate billing line. Their company is allowing that cost to be covered by allowing the management company to get paid back fees from the investments the employees are selecting. Over the last few years, a great deal of research has been performed and reported on by those who believe the public deserves to receive transparency on the actual expenses involved with investments. Two University professors – Yale’s Ian Ayres and Virginia’s Quinn Curtis – discovered that almost a full percentage point more in annual fees for over 3000 employer sponsored 401(K) retirement plans was paid versus paying for low-cost retail index funds commonly available to retail investors.
Put Your Company’s SDBA to Your Advantage
Unfortunately, your 401(k) may not provide the dexterity to transfer into less expensive investment vehicles. Luckily, some companies provide for a Self-Directed Brokerage Account (SDBA) that allows an investor greater choice of investment options. But how many of those that take advantage of this tactic are truly skilled to make the best choices and then to know when to hold and when to fold back into safer avenues? This is where an independent Registered Investment Advisor may be beneficial. They have a fiduciary duty to their clients, which means that he or she has a fundamental obligation to provide suitable investment advice and always act in the clients' best interests.
Is Your Advisor Looking Out For Your Best Interest or Theirs?
Your best interests should be aligned with your goals and not with providing the best commission and/or fees to the advisor. When choosing an advisor you should be ready to ask them a few questions on the fees they receive when they suggest a certain investment vehicle. It should make you wonder if they are getting paid to recommend your investments if it is really in your best interests. Selecting a fee-only advisor means they are concerned with increasing your wealth and not with selling you a product. A fee-only advisor doesn’t stay in business very long if their advice doesn’t pan out for you.
Will You Be Prepared to Roll Over Your 401(k)?
So let’s go back to the initial premise of this discussion, the cost of advice in your 401(k) vs paying for an outside advisor. When the time comes for rolling over that company managed 401(k) will you be ready with someone to manage your nest egg at a low cost with a clearly identified strategy? Spending the time now to select and advisor that has shown you a low cost path is invaluable. After you retire you will need that nest egg to support you for potentially 30 or more years. The less you are paying in fees during that time, the more you should be able to draw from your investments without creating a larger risk of spending down your savings too soon. Basically, during the time line of a multi-decade career and retirement, holding the line on costs can increase your odds of achieving a more secure financial retirement.
There is no guarantee that the lowest cost will also mean the best returns. The saying “a penny wise and pound foolish” is applicable to you understanding what costs you are actually paying but not knowing what you are getting for that cost. Do you truly know where all your returns are going?
Tom is the Founder of TRG and has been the President and Chief Investment Officer since 2008.