Are you a football fan? If somebody gave you $10,000 and said that you had to wager that money on who would be best team of the three, would you pick the Dolphins (0-5), the Broncos (1-4) the Rams (0-5) or the Colts? (0-6) Not a football fan? If somebody gave you $30,000 and said that you had to purchase a car, would you buy one that had been in a wreck, one that had a long history of repairs, or one that was 25 years old with 180,000 miles on it?
Doesn’t sound very fair, does it? If you’re a football fan, you want one of those choices to be the Packers (6-0) and if you’re buying a car, you want one of those choices to be a new car with a warranty. This is common sense, right? If you have to pick a winner in anything, you don’t want to choose from a list of proven losers.
If you have a company sponsored 401(k) plan as your main retirement vehicle, you probably remember choosing from a list of funds and since you’re not in the business of picking mutual funds, the only thing you knew was that you should get a mix of funds.
You can know a winning football team by looking at their record and you know a winning mutual fund by looking at their past returns relative to an index like the S&P 500 but either of those tell the whole story. Mutual funds are complicated and the bottom line is this: You aren’t always offered the best investments. Your company is giving you a very limited choice of funds to choose from and the choice you’re making isn’t much different than the football teams or the cars above.
You Can Fix That!
Here’s what you do. First, you ask your company if they allow for a self-directed plan. A self-directed plan is one where they set up a retirement account at a brokerage of their choosing. In order to meet Federal and state reporting requirements they have to have access to your account so you are stuck using the brokerage they choose.
Second, they probably won’t allow all of your funds to be self-directed. Maybe 50% give or take a little bit. Last, they may charge you a yearly fee of $50 to as much as $300. This seems like a hefty amount in order to do your own work but compared to the big time fees you’re paying in those sub-par mutual funds, you may still come out ahead without looking at performance by choosing products with a low maintenance fee.
Once you do that, find a wealth management advisor to help you. You can do one of two things: You can pay them a flat fee for an annual or semi-annual look at your account or you can pay them for ongoing management of the funds. They will typically charge 2% of your portfolio balance if you prefer ongoing management.
In the end, a self-directed plan managed by somebody with the flexibility to control the fees associated with the products will not only save you money, they will be able to lock in much better rates of return because of the large, diverse range of products available to them.
You don’t have to keep all of your funds stuck in those losing 401(k) funds. A portion of your money can be self-managed allowing you the flexibility to make a lot more money and retire comfortably.