In today’s world, you easily get advice on just about anything. Where to get the best price on suits. How to change a flat tire. Where to go for the best manicure. Etc., etc. Advice, it seems, is everywhere, and mostly free for the taking, and many consumers take full advantage of it to better their lives or make smarter decisions.
But, what about financial advice regarding your retirement plans, like your 401(k) and/or IRA? Do you really need advice and, if you get it, will it help you get better results (i.e. more money to spend when you reach your ‘golden years’)?
The answer to both of those questions is a definitive ‘yes’ but, unfortunately, most consumers who have a retirement plan either don’t seek out advice or, even worse, take the advice of an unqualified ‘advisor’ rather than seeking out an expert. That’s not good, because even a small mistake when starting your retirement plan can multiply into a huge financial loss when retirement finally arrives.
For example, let’s take a look at management fees: Management fees are the costs you pay to have your retirement fund ‘looked after’, so to speak, while your money is busy accruing equity. In a 401(k) you can lump all your fees into what’s called the ‘expense ratio’, or, the cost of your investments. So, knowing that, and knowing that you should always try to keep your expense ratio as low as possible for the highest returns over time, which of the below two choices would be best?
1- A retirement fund offering 9.2% returns with 1.4% expense ratio
2- A retirement fund offering 8.4% returns with a 0.2% expense ratio
If you said choice #1 you’d be wrong, even though the return is higher. Fund #2 would actually lead to bigger gains as the net return would be 8.2% (8.4% - 0.2% = 8.2%), as opposed to #1 at 7.8% (9.2% - 1.4% = 7.8%). Thus, the fund with the lower gross returns would actually be the better fund due to its lower expense ratio.
That might seem like basic math, but without the basic knowledge needed to know the difference, many consumers choose #1 simply because the returns look higher upon initial glance.
This is why competent, quality advice on your retirement plans is so vital. There are so many small choices that we must make over the lifetime of your retirement account, and all of them will have either a positive or negative impact that you may not find out about until it is too late & you have lost thousands, maybe hundreds of thousands of dollars.
Seeking out a financial expert who specializes in retirement funds like 401(k)s and IRAs is a must, and finding them when you begin to invest is the key. (Let’s face it - great advice about how to save for retirement after you’ve actually retired probably won’t do you much good.)
Some companies provide an Investment Advisor to the employees who take advantage of their 401(k) plans, whereby the employee can actively learn about investing, receive guidance and get sound advice. If you have a 401(k), your best choice is to take as much advice as you can get.
- Robert J. Alexander
Mr. Alexander is a Pension Consultant for Wellington Retirement Solutions, Inc. with over 10 years of experience in the retirement plan industry. Wellington Retirement Solutions, Inc. can help you determine what type of 401(k) Plan is ideal for your business. Even if you already have a 401(k) Plan, allow us to review your Plan provisions for peace of mind to know that the design of your 401(k) Plan meets your goals & objectives. We are committed to providing personal service excellence. If you have any questions regarding the information in this article then please reach out to one of our specialists at (888) 934-4015.