Components Of A Successful Plan
Like complex machines, 401 plans have many different moving parts that must be coordinated to run smoothly and meet the needs of the organization sponsoring the plan. These moving components people, businesses and systems represent the delivery structure of the various service areas such as administration, investment management and employee communications. Delivery of these services in a format consistent with your organizations expectations is critical. If the different components dont fit well together or match your needs, the results may include incorrect depositing of funds, inaccurate and untimely participant information or IRS reporting, and/or employees who dont understand, appreciate or participate in the plan.
In general, all 401 plans have the same basic objective to serve as a retirement savings plan for employees. Yet there are many different 401 plan models that suit a wide range of specific company needs. The 401 advisors role is to help you set reasonable expectations, select the most appropriate plan, then manage all the components on an ongoing basis to help ensure a successful plan.
Having Your Own Adviser Means Access To Broader Advice
Using an adviser for a self-directed 401 brokerage account can present more advantages than just increased performance and potentially lower fees. Selecting an adviser who will plan for and manage your overall financial strategy will lead to a coordinated plan that has all the assets working toward all of your goals, not just a single retirement account. For example, many investors have multiple investment accounts in different places, and an adviser can take a comprehensive look at all of them to see how those can fit into the investment mix to achieve the desired outcome. Most are invested without consideration to the whole picture more of a piecemeal situation. An adviser can also advise on Social Security strategies and how to integrate other retirement income into the complete picture.
An adviser is likely to cost annually between 0.5% and 1% of the assets under management, but that may be less than the average fees you pay on plan investments which include both the fees an employers registered investment adviser would charge and the fees that the mutual funds themselves charge and the advisers fee covers much broader services. The adviser can help find ways to take the most advantage of the 401 plan while not losing sight of your near-term goals. As you age and earn more, your goals and objectives will change, and your adviser can help manage these life changes.
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You Have Old 401 Accounts With Former Employers
Keeping your retirement portfolio consolidated and organized makes managing your finances and staying on top of your portfolio much easier. Whether you roll your old accounts into your current 401 or into an IRA, having it all in one place makes things easier.
However, you’ll want to make sure that you won’t be missing out on any special investment options in your old plans, like guaranteed rate funds. And if you’re considering converting IRAs to Roth IRAs, talk to a financial planner before rolling over old 401s into an IRA.
S: A Great Tool For Tax Planning
401s can also provide a considerable break on your taxes, in several ways.
First, the contributions are taken out of your paycheck pretax if you participate in a traditional 401. That means you are not taxed on the money you save for retirement at all, which lowers your taxes.
It also can lower your tax bracket, because it lowers the overall taxable income you report to the IRS for the year.
Both your and any employer contributions grow tax-free until you withdraw them at retirement. This is an enormous benefit because it allows maximum appreciation with no tax bite until retirement.
Some employers offer a Roth 401, which has a slightly different tax benefit. Roth contributions, unlike those in traditional accounts, are made with after-tax money, so do not have an initial tax advantage. The money grows tax-free until you retire, just like that in a traditional 401. The tax savings in Roth 401s come at retirement. Unlike withdrawals from traditional 401 accounts, Roth withdrawals are not taxed .
What difference does that make? Well, it can make a profound difference when youre retired! If you save in a 401 when youre young, your retirement income may be higher than it is when you contribute. That means your tax bracket in retirement may be higher currently is. You may save money on taxes in retirement by investing in a Roth, where $3,000 withdrawn is $3,000 to you.
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Why You Dont Need A Financial Advisor
One of the most commonly held misconceptions in investing is the idea that you must work with a financial advisor in order to be successful.
Perhaps this myth has persisted for so long thanks to persistent marketing on behalf of financial advisory firms.
However, the reality is that investors who manage their own money are often able to perform just as well or better than those who work with a financial advisor and without any high fees eating into their returns.
If youre still on the fence about whether or not you actually need a financial advisor to be a successful investor, consider these points.
The History Of 401 Plans
The tax code changed in 1978, unintentionally prompting the creation of the 401 savings plan that has largely supplanted company-funded pensions. Intended to clarify the legal status of some extremely wealthy investors existing saving plans, this minor rule adjustment sparked a decade-long financial industry and market boom in the 1990s.
Since the 1980s, when the 401 plan was established in a single financial institution, these plans have evolved into a government-sponsored private investment intended to help employees save for retirement in order to augment their Social Security income. In the first six years of the program, several hundred thousand businesses provided plans as an incentive to their staff. These savings accounts were offered as an option benefit to individuals of all sorts of professions throughout the 1990s.
In 1988, following a series of legislative actions designed to boost participation rates in 401 plans among US workers, the Congress passed a legislation that made employee contributions the default option for all firms offering such programs. Employees wanting to opt out of making 401 contributions have been required to fill out a form stating their wish to do so.
Reasons for Supplemental Retirement Savings
Social Security benefits, in combination with Medicare and Medicaid, are generally not considered adequate alone for sustaining one above the poverty level in retirement.
Inadequacy of Social Security Coverage
Medicare and Medicaid
IRA Plans
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Be Wary Of Target Date Funds
Think hard before you simply invest your 401 in a target-date fund. The idea of these funds is that they’re geared to evolve as you move closer to retirement. If youre planning to retire in 2035, for example, you would invest in a target-date fund that matures in that year. The funds managers will continually re-balance the fund to maintain an appropriate allocation as the target date gets closer.
Here’s why this type of fund may not be the best choice. For starters, funds use different allocation strategies, which may or may not be a good match with your goals. As experts point out, a target date funds performance is largely based on the fund managers. Since you probably dont know the good managers from the bad, picking a fund is difficult.
Equally important, fees for these funds are often high, and novice investors dont understand the golden rule of target-date funds. If you invest in one, you shouldnt mix it with other investments. Most financial advisors agree that its close to an all-or-nothing investment. Investing your 401 in other funds as well throws off the allocation.
One-stop shopping is appealing, but just because these vehicles are a simple way to invest doesnt mean that they’re easy to understand or the right place to park your retirement funds.
Emphasis On Financial Planning
An advisor who moves a client from a low-cost 401 to a more expensive IRA will need to justify his fees, Thompson said.
As an investor, you may see your advisor do this by providing you with enhanced service, including customized financial planning and income distribution planning.
“More advisors have flat fees as part of their structure as they place more emphasis on service above and beyond the investment process,” said Rob Cirrotti, head of retirement and investment solutions at Pershing LLC. “That gets back to the financial planning process.”
Some of that additional advice might include planning out your income stream, customizing your investment selection and devising a strategy for the required minimum distributions you must take from your retirement accounts after age 70½.
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You Haven’t Rebalanced Your 401 Account Or You’ve Left It In Cash
You’d be amazed at how many 401 accounts I see with 50% or more sitting in cash. Given that 401 funds are earmarked for retirement, investing them in a diversified portfolio that’s appropriate for your time horizon and tolerance for risk is a solid choice.
Not sure what to invest in? Target date funds are designed to give you a diversified portfolio intended for a specific target retirement date, all in one fund, that’s automatically rebalanced for you. So if you’re unsure how to invest, see if your 401 offers target date funds, preferably ones with low fees.
Do I Need A Financial Advisor To Manage My 401 Plan
If you already have a personal financial advisor, they can probably advise you on how to invest your 401 contributions. Several employer 401 plans also have financial advisors on-call to help plan participants. Whether or not you need to consult a financial advisor will depend on your financial literacy, comfort, and cost-sensitivity .
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Stay On Top Of Your Fundsdon’t Just Contribute And Forget About It
Today, many companies use 401 plans for creating retirement accounts for their employees. A portion of your paycheckoften along with a little matching-fund incentive from your companygoes into an account and you are charged with managing the allocation of those funds into an offering of investment products.
Gaining a grasp of some of the 401 plan foundations will help you manage your fund with greater authority and ease. With the right basic principles in place, you’ll be better positioned to make the decisions that relate to your individual financial situation.
Approaching Your Employer With Better 401 Options
These are the primary reasons for why you should invest in a Roth IRA:
- mutual funds with stocks
- money market funds
- guaranteed investments accounts or bank accounts/notes
All of these have distinct return profiles, with equities typically being the highest earners and both bonds and money market funds considered to be a good choice. CDs or savings accounts with guaranteed interest are the lowest yielding investments, however they are usually quite secure.
It is possible that you will not have access to all of these alternatives when picking a plan, and the management choices available to you may be less than optimal. If you have better options, please do not hesitate to contact your human resources department. Employers simply want to make their workers happy and are glad to let you do the job on your own time, especially if it can save them money as well.
Recruiting Fellow Employees to Help
It is possible that a large number of individuals requesting the same modifications to your companys financial planning may be required to make anything happen. It is often a smart idea to write out a letter with your own plan of action plainly described. You can then talk to other employees and get them to sign a petition after that. The letter should be polite yet businesslike, as well as succinctly stating goals and ways to achieve them.
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Are Financial Advisers Walled Off From Directly Helping Clients With Their 401s
- Publish date: Oct 8, 2016 2:20 PM EDT
It’s a gray area, but there are definitely obstacles to financial advisors looking to merge 401 planning into their services – and that hurts retirement savers.
Editors’ pick: Originally published Oct. 4.
The 401 plan retirement system holds $4.8 trillion in assets as of March 2016, on behalf of more than 52 million active participants and millions of former employees and retirees, states the Washington, D.C.-based Investment Company Institute.
Somewhat incredibly, American money managers say they face huge roadblocks in getting access to client 401 plans and thus face issues in advising clients on their number-one retirement savings building block.
“A huge chunk of retirement savings – 401 plans – is sitting generally unattended, with the people who are saving getting little to no advice on how to invest it and most advisors in no position to give them advice,” says Craig Wear, a certified financial planner and founder of Q3 Advisors and Game Plan Advisors, in Houston, Tx
“For a lot of people – maybe most people – an employer-sponsored 401 represents their biggest investment,” Wear adds. “Yet in most cases, their financial advisor has no access to that money and can’t easily and effectively help them manage it.”
Wear also notes that financial professionals can’t get involved with their clients’ 401 plans for multiple reasons, with two being paramount:
“It’s left up to the investor to find help,” he adds.
Do I Need A Financial Advisor For My 401
With the demise of company pensions, 401 plans have become the de facto retirement plan for the majority of American workers. These company retirement plans make it easy for employees to save for the future through payroll deductions. However, most employees are on their own when picking their 401 investments and how much to contribute each year. While there are some rules you can follow on your own, a financial advisor may also be able to help you make the most of your 401.
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Learn Which Financial Advisors Have Your Back
Financial advisors go by many names: investment advisors, brokers, certified financial planners, financial coaches, portfolio managers. There are even financial therapists. So who does what and who can you trust?
Since some of the most common titles advisors use, including the term “financial advisor” itself, aren’t tied to any specific credentials, dont assume that someone who uses an official-sounding title has any specific training or credentials. Anyone who gives investment advice must be registered as an investment advisor with either the U.S. Securities and Exchange Commission or the state, depending on their assets under management.
Some financial advisors have a fiduciary duty to their clients, meaning they are obligated to act in their clients best interest rather than their own. Always work with a licensed, registered fiduciary preferably one who is fee-only, which means the advisor is paid directly by you and not through commissions for selling certain investment or insurance products. Certified financial planners have a fiduciary duty to their clients as part of their certification.
No matter what title, designation, certification or license an advisor claims to have, its on you to vet the advisors credentials and experience. Always research an advisors background by looking up the firm’s Form ADV before you agree to work with them. You can also review an advisor’s employment record on FINRA’s BrokerCheck website.
Pick A Diversification Mix Based On Your Age
Weve provided rough estimates of how you can diversify your portfolio in this article, but remember that this is just an estimate. For instance, if youre in your 20s, you might put 60 percent of your portfolio in domestic stocks, 40 percent in foreign stocks, and nothing in bonds. To do this, it will require you to know a little bit about each of the funds offered by your 401 provider.
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Who’s Eligible To Enroll In Vanguard Digital Advisor
To enroll, you’ll need to meet the following requirements:
- You have a retail Vanguard Brokerage Account with a balance of at least $3,000.
- You’re a United States resident, or you have an APO/FPO/DPO mailing address.
- Youre at least 18 years of age.
- You’re notor live in the same household asa board member, executive, or someone whos able to influence policy in a publicly traded corporation.
If you have a Vanguard-administered 401 retirement account, you may also be eligible to enroll.7 Restrictions may apply to certain organization members.
Vanguard Brokerage Option accounts offered by plan sponsors aren’t eligible for management by Digital Advisor. Special notice to non-U.S. investors
