Do You Know What’s Wrong With Your 401(k)?
More employers are providing investment advice. But is it any good?
“Employers are stressing the concept of financial wellness,” wrote the authors.
But how would you know if the advice you’re getting is good or not? What sort of questions might you ask of your retirement plan adviser? What might you avoid? And what are the “must-haves” with respect to 401(k) advice?
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Set a Goal and Track Your Progress
Experts say the first step to knowing whether you’re getting good advice (in-person, by phone, or through an online service) is defining what good advice is.
“Typically, when we are defining good advice from a retirement perspective, it becomes a readiness issue,” said Sherrie Grabot, President and CEO of GuidedChoice, an advisory service.
And knowing how ready you are requires having a retirement goal, a baseline, and way to track your progress. “Are you getting closer to your goal than you were prior to receiving the advice?” asked Grabot.
From her perspective, having the ability to track your progress, factoring in cash flows and the like, against a goal is a critical part of good 401(k) advice.
So too is knowing whether you are deferring enough of your salary into your 401(k), given your current asset allocation, time horizon, investment goal and risk tolerance, said José Jara, a principal with Buck Consultants, a Xerox Company.
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“One of the more important things that a participant needs to understand is whether they are saving enough,” said Jara. In short, good 401(k) advice will assess — given your specific retirement goals — whether you are saving enough or need to save more.
And remember, meeting with someone once a week might not be enough to be defined as good advice. “I would suggest that the participant evaluate the value of the ‘advice’ to their overall retirement planning,” said Jason Roberts, CEO of the Pension Resource Institute. “For example, meeting once a week or over the phone with someone who tells you how to allocate your in-plan assets may not be enough to get a participant on track.”
That’s not to say that meeting with an adviser isn’t important. For instance, David Weiskopf, senior director of corporate communications at Financial Engines, an investment advisory firm, said a good adviser will “stay in regular touch making sure the participant understands how their strategy is progressing and making any appropriate changes.”
Grabot recommends asking your 401(k) adviser: How do you define success? What is the benchmark or baseline and how will you and I track performance?
Is the Advice Personalized?
Experts also say that good advice is personalized and customized. And one way of telling whether the advice personalized is “if the adviser asks questions about (your) situation whether online, on phone, or in person,” said Fred Barstein, Founder and CEO of the Retirement University Advisor University.
Others agree. “At a minimum, I would want to know whether the adviser can provide me with individualized guidance on the level of deferrals necessary to meet my retirement objectives given my current allocation and risk tolerance,” Roberts said. “Many times this approach will have a greater impact than simply helping someone construct a portfolio.”
Experts also say that good advice goes beyond asset allocation and the like. In fact, good advice would be holistic, where an adviser addresses financial wellness issues such as debt and assets outside of your 401(k). “They should look at a participant’s overall financial picture when making recommendations,” said Weiskopf. “Then they can build a personalized solution specific to a participant’s situation and needs.”
Of note, Weiskopf also recommends asking a 401(k) adviser for advice about claiming Social Security. Ask: When should I claim Security, how long should I defer claiming Social Security, and how should I maximize my 401(k) assets and Social Security payments together? You might also add to this list a question about working during retirement and ways to create tax-efficient income given all your sources of income during retirement.
Is the Advice Delivered in Person?
Other advisers, including those who have a bias (it’s their business model), see in-person, independent participant advice as becoming absolutely critical for successful retirement outcomes.
“From the participant point of view, in person and independence are key,” said Mark Davis, a senior vice president with CAPTRUST Financial Advisors. “We have learned that most participants still strongly prefer to receive their advice from a face, not an interface.”
To be sure, firms and individuals who deliver investment advisory services online or over the phone might disagree. But even Grabot recommends avoiding any service that is not personalized. “In today’s technology world, you can get a personalized solution for less than almost all “one-size-fits-all” type of solution,” she said.
Is the Advice Objective?
Regardless whether the advice is delivered online, face-to-face, or via a customer service representative over the phone, experts say good advice is free from conflict and is objective. Plus, it comes from a fiduciary. Rick Meigs, the president of the 401khelpcenter.com, recommends asking: “Do you consider yourself a fiduciary under ERISA with respect to the recommendations you provide me?”
Bard Larsen, an executive vice president of ERISA Fiduciary Advisors, agrees. “A participant will want to know if the adviser is compensated the same regardless of the advice provided,” he said. “The adviser should have no self-interest involved in making recommendations to the participant,” he said. “The adviser must act in the best interest of the participant.”
In fact, Roberts said one must-ask question of any 401(k) adviser you have designs on working with is whether they stand to benefit financially from recommending one investment product or service over another.
Robert Powell is a MarketWatch retirement columnist. He has been a journalist covering personal finance issues for more than 20 years. Follow him on Twitter @RJPIII.