A study from Dalbar Inc. released in April found the average equity investor underperformed the S&P 500 for the preceding one, three, five, ten and twenty year periods. Many investors in 401(k) accounts choose their investments and rarely change them. Investors also tend to make decisions based on which investments did well the year before.
Many 401(k) investors have averaged low returns for their decisions and had nowhere to turn for advice.
That may be changing. A recent trend of professional advice for individual 401(k) accounts has emerged to help participants better choose their investments. The 2012 Vanguard study “How America Saves” states that last year, one-third of all Vanguard 401(k) participants utilized professional investment advice for investments in their individual 401(k) accounts.
Advice for your 401(k) or other employer sponsored plan comes in three varieties: Target Date Funds (TDF); plan-provided advice; and independent advice.
How do you choose?
A TDF can be helpful for someone just starting. A TDF provides diversification you normally would not get with a smaller amount to invest. The mix adjusts based on time left to retirement without regard to the market. If there is a significant market downturn, your account will still have significant risk for its equity based holdings, regardless of the year you wish to retire.
Plan-provided advice can be useful and helpful to the individual who needs more than a single fund solution. Here is where the plan provided advisor can be helpful. They will typically be accessible through a toll free number and charge a fee based on a percentage of the account balance.
Independent advice typically comes from a fee-based registered investment advisor. Registered Investment Advisors have a duty to put the investor’s needs first and may be able to help coordinate your 401(k) in an overall plan with your other assets. They will typically charge a fee based on a percentage of the account balance or a flat fee.
The bottom line is that all three options give you the opportunity to improve your investment decisions on one of your largest assets.