Getting Sound Advice for Your 401(k)


The Obama administration has dropped a Bush-era plan to make it easier for brokerages and mutual fund companies to give investment advice to participants in 401(k) plans the firms administer.

Where, then, should employees turn for investment advice, and what would good advisers tell them?

The advice plan, part of the Pension Protection Act of 2006, was meant to help employees do a better job picking investments such as mutual funds. But the Obama administration said it was swayed by critics who worried brokerages and fund companies would put their own interests ahead of employees’.

A fund company that administers a company’s 401(k) plan cannot be expected to warn employees that some of the funds in the plan are no good, critics said. There was also a fear that fund firms and brokerages would use advice sessions to urge employees to invest in other funds on top of their 401(k) holdings.

Still, studies have long shown that many 401(k) participants do not handle accounts well on their own. About a third of employees do not participate at all. Many who do put too little aside or invest too conservatively to build enough for retirement.

Many plan participants do need professional help. Experts say employees do best with advisers who are free of conflicts of interest. One way is to use a “fee-only” adviser who is paid a flat rate or hourly fee to give advice but does not sell products or earn commissions. Fee-only advisers are represented by the National Association of Personal Financial Advisors, which has a referral service on its site.

A good adviser would start by looking at the investor’s entire financial situation, determining how the 401(k) would fit in with taxable investments, IRAs and other assets. The adviser would devise a long-term strategy based on the investor’s age, future financial prospects and tolerance for risk.

In looking at the investor’s 401(k), the adviser would evaluate the investment options offered by the plan. A good plan would have an assortment of choices so the employee could pick an appropriate mix of stocks, bonds and cash.

But if the plan had poor offerings in one category, the adviser might suggest looking outside the plan for that type of investment.

Most employees would be advised to follow a few standard rules of thumb:

  • At a minimum, invest enough to get the entire matching contribution offered by the employer. Otherwise, you are just leaving money on the table.
  • Don’t put too much into the company’s stock, as individual stocks are very risky. Google (Stock Quote: GOOG) employees have done wonderfully, while many Enron workers were wiped out.
  • Steer clear of funds that have high fees, or expense ratios, as they chew away at profits.
  • Be sure that the stock-to-bond ratios in life-cycle or target-date funds really fit your needs.
  • Increase regular contributions after every raise.
  • Don’t borrow against the account, else you miss out on potential gains.
  • Don’t take a lump-sum distribution upon retiring, as the tax bill may be very high and you’ll miss out on gains needed for 20 or 30 years of retirement.

According to some reports, the Obama administration is looking for a new way to make it easier for employees to get professional advice. Until then, they are on their own.

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