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Millions of Americans have 401(k) retirement plans through their employers, but many people aren’t quite sure how best to manage their investments. The different fund options may be confusing and it can be difficult to know how much money to put in different asset classes.
Here’s what to know about managing your 401(k) plan and how a financial advisor can help make sure you’re on the right track.
What is a 401(k) plan?
A 401(k) plan is a tax-advantaged retirement plan offered by employers. The plan allows employees to set aside a certain percentage of their salary each year for their 401(k), where the money can then be invested and grow tax-free until retirement age.
Many employers also offer a 401(k) match, where they agree to match a portion of the employee’s contributions. For example, an employer may match 100 percent of your contributions up to 4 or 5 percent of your salary, giving you a total contribution of 8-10 percent. Financial advisors say this match is like free money, because it is effectively a 100 percent return on your investment.
The main advantage of a 401(k) plan is that you won’t pay taxes until you start taking withdrawals during retirement, so your money can compound for decades. But you’ll need to select which investments to own in order for the compounding to occur, which can be intimidating for inexperienced investors.
Do I need a financial advisor for my 401(k) plan?
Some people will be able to navigate their 401(k) plan on their own, setting up their contributions and selecting investments from the list of fund options. You may even be able to get some free guidance from your plan administrator or from your employer.
However, some investors just aren’t comfortable making investment decisions on their own and may need a professional to guide them through their 401(k) plan. That’s where a financial advisor can be a big help. A good financial advisor will help you understand your 401(k) plan and select funds that make sense for your risk tolerance and time horizon.
Here are some of the ways a financial advisor can help with your your 401(k) plan:
- General education
- An advisor can help you understand how your 401(k) plan works and answer any questions you may have.
- Select investments
- A financial advisor will help you identify which funds to invest in based on your goals, and adjust those choices over time as your goals evolve or change.
- Keep you on track
- A financial advisor can also help you stay on track when markets go down. They can also help you with a 401(k) rollover if you leave your job.
Here are some key questions to ask a potential financial advisor before you agree to become a client.
How much does a financial advisor cost?
The main downside of using a financial advisor to assist you with your 401(k) plan is that it comes with a cost, which ultimately eats into the return you earn as an investor. That being said, a good financial advisor can more than justify their fee by helping you with your investments and keeping you on track over the course of your investing life.
Financial advisors can earn fees in a few different ways. Some earn commissions on the sale of certain financial products, which should raise flags of concern for clients. Commission-based fees incentivize advisors to put their clients in products that earn them fees and may not be the best options for the clients.
Fee-only advisors are paid directly by their clients, either as a percentage of assets under management, or at an hourly or annual rate. The fees can vary widely among advisors and it may depend on the level of service you’ll require as a client. In general, financial advisors charge around 1 percent of client assets.
If you’re just looking for help with setting up your 401(k), you may consider having a one-time meeting with an advisor and paying an hourly rate.
Bottom line
Whether or not you need a financial advisor to help with your 401(k) plan will depend on how comfortable you are choosing and managing investments. You don’t necessarily need to be a financial expert to handle it on your own, but if you’re totally new to investing, meeting with a financial advisor could be beneficial.
Be sure you understand how the advisor is being paid before agreeing to become a client. You’ll also want to decide if you’re just looking for one-time advice or are looking for an ongoing relationship.
If you’re looking for a financial advisor in your area, consider using Bankrate’s financial advisor matching tool.
FAQs
A financial advisor will help you identify which funds to invest in based on your goals, and adjust those choices over time as your goals evolve or change. Keep you on track. A financial advisor can also help you stay on track when markets go down. They can also help you with a 401(k) rollover if you leave your job.
Should I move my 401k to a financial advisor? ›
Consolidating your retirement money in one place is a good idea, and bringing a financial advisor into the mix may be an even better move. Just understand that if you've got money to be managed, you're a hot commodity for both scrupulous advisors and unscrupulous ones.
Is it worth paying someone to manage your 401k? ›
While this may be an added cost, it's worth noting that it typically covers much broader services than the fees you already pay on your 401(k) plan. Additionally, with the right adviser, the personalized advice and improved performance they can provide may outweigh the cost of their fees over time.
Do you really need a financial advisor for retirement? ›
Bottom line. While not everyone needs a financial advisor, many people would benefit from personalized advice to help them build a strong financial future. You don't need to have a lot of wealth to take advantage of a financial advisor.
How much does it cost to have someone manage your 401k? ›
Financial advisor fees
| Fee type | Typical cost |
|---|
| Assets under management (AUM) | 0.25% to 0.50% annually for a robo-advisor; 1% for a traditional in-person financial advisor. |
| Flat annual fee (retainer) | $2,000 to $7,500. |
| Hourly fee | $200 to $400. |
| Per-plan fee | $1,000 to $3,000. |
Many companies offer self-directed or brokerage window functions that allow for self-managed 401(k) plans. Self-directed plans provide access to a wider swath of investments, including non-traditional assets like real estate. The broader investment choices may invite unforeseen tax consequences.
Where is the safest place to put a 401k after retirement? ›
The safest place to put your retirement funds is in low-risk investments and savings options with guaranteed growth. Low-risk investments and savings options include fixed annuities, savings accounts, CDs, treasury securities, and money market accounts.
How does a financial advisor get paid on a 401k? ›
Asset-Based Model
Plan sponsors that hire an investment adviser pay an asset-based fee equal to a percentage of the assets in the plan. Example: Let's Make A Deal, Inc. has a 401(k) plan with $1,000,000 in assets. They hire Alex Adviser who charges a fee of 0.50% (also expressed as 50 basis points).
Do millionaires use 401k? ›
According to Fidelity, there were 378,000 millionaires with 401(k) accounts in the second quarter of 2023, up 10% from the year-earlier period.
What are the main disadvantages of a 401k? ›
There are, however, some challenges with a 401(k) plan.
- Most plans have limited flexibility as it relates to quality and quantity of investment options.
- Fees can be high especially in smaller company plans.
- There can be early withdrawal penalties equal to 10% of the amount withdrawn before age 59 1/2.
Costs: Financial advisors cost money, and not all charge you in the same way. Some charge a percentage of your total portfolio per year. Others charge you an ongoing annual fee, some charge a one-off service fee, while the investment broker pays others via commissions.
At what point is it worth getting a financial advisor? ›
A financial advisor is worth paying for if they provide help you need, whether because you don't have the time or financial acumen or you simply don't want to deal with your finances. An advisor may be especially valuable if you have complicated finances that would benefit from professional help.
Who is the best person to talk to about retirement? ›
If you're looking for help building a retirement nest egg, you most likely want a certified financial planner (CFP) with expertise in retirement planning. Other financial advisors who may specialize in retirement planning can be identified by various credentials following their names.
Who to talk to about 401k? ›
If the 401(k) plan you have at work isn't as good as you think it should be, it could be worth taking up the matter with your company's human resources department. HR might not make the ultimate decisions, but it's the place to start.
What does Charles Schwab charge for a financial advisor? ›
Schwab and CSIM are subsidiaries of The Charles Schwab Corporation. There is no advisory fee or commissions charged for Schwab Intelligent Portfolios.
What is the average 401k advisor fee by plan size? ›
The average fee for 401(k) plans can vary depending on the size of the plan. Generally, for smaller plans (less than $250,000 in assets), the average fee is around 1% of total assets; for larger plans (over $500,000 in assets), the average fee drops to 0.6%.
Should I move my 401k into something more conservative? ›
Changing Your Asset Allocation As You Age
Many financial experts suggest adjusting it as you grow older, opting for a more conservative mix as you get closer to retirement age. As mentioned above, target date funds will automatically decide this appropriate allocation for you and change as you age.
What are some disadvantages of using a financial advisor? ›
While it's easy to see the many advantages a financial advisor has, we want to also bring up the potential disadvantages so you can make informed decisions:
- They may have a conflict of interest.
- They could charge high fees.
- You could feel left in the dark.
No taxes or penalties: With a direct 401(k) rollover into a traditional IRA, taxes continue to be deferred until you withdraw money. Wider investment selection: You get access to a range of investment options, including stocks, bonds, mutual funds, index funds and exchange-traded funds.
