Even if some of us (especially public sector employees) aren't required to do so today, soon we will all have to learn how to save and invest wisely in a 401(k) plan. Pension plans are on their way out, and plan provided guaranteed benefits will soon be no longer be the case. And since we're living longer and longer as a society, having enough money socked away for our old age years is becoming increasingly critical. In fact, it won't be uncommon to spend more time in our retirement years than we spent working.
The solution to all this is a quite simple one for the young --- have your "today self" do the right thing for your "tomorrow self." Down the road, "he'll" be glad you did. So will "you."
Now let's switch gears and talk about getting help for "today's self." I'm a proponent of not paying excessive fees for professional financial advice. In addition, I'm also convinced that most "experts" aren't experts at all. An intermediary is an intermediary, whether he's a real estate broker, an insurance agent, a stock broker or any other kind of financial adviser.
Money not spent is money earned and that money can be invested and earn returns over a lifetime. That said, the Pogo factor (We have met the enemy and he is us.) comes into play when investing, and fear and greed are also powerful enemies of "today's self." Thus, sometimes it's best at least initially to engage someone on our behalf who can help us, doesn't charge much and also adds real value to the investment process.
And that's just what a new study reveals on the go-it-alone versus find-a-friend approach to financial advice over time. Of course, some are equipped to go-it-alone, but for those who aren't or at least aren't yet capable of doing so, it's appropriate to consider getting some assistance, idea sharing or just plain old hand holding from time to time, especially during those times when the market is gyrating wildly in a downward direction.
Your 401(k) plan's secret weapon tells a compelling story about the need for advice when investing for the long haul:
"When it comes to building retirement wealth, growing numbers of 401(k) participants are seeking help from online advice programs and professional money managers. But is that advice worth paying for?
According to a study released today, the answer is an emphatic yes. Between 2006 and 2012, participants in 401(k) plans who paid extra for advice earned an average of 3.32 percentage points more per year, after fees, than those taking do-it-yourself approach. If continued over 20 years, that annual performance edge would boost retirement wealth by 79%, according to the report, Help in Defined Contribution Plans: 2006 through 2012.
The takeaway: “If your employer makes professional investment help available to you, you should use it,” says co-author Wei-Yin Hu, vice president of investment research at Financial Engines, a Sunnyvale, Calif., company. Financial Engines specializes in managed accounts, which allow 401(k) participants to hire professionals to advise them on how to invest their assets. “You will end up doing better, on average, than a do-it-yourselfer,” Hu said.
Of course, Financial Engines has a vested interest in having people pay for advice. Clients with its managed accounts typically pay from 0.15% to 0.7% a year, in addition to the fees of the mutual funds they invest in. The study’s co-sponsor is Aon Hewitt, a record keeper for 401(k) plans.
The study, which looked at 14 defined contribution plans with a total of more than 723,000 participants, found that those using help now account for 34.4% of all 401(k) participants, up from 30% in 2011. Within 401(k) plans, investment advice typically takes three forms. The first, and most popular, is the target-date fund, which allows investors to pick a fund with a target date that matches their projected retirement year.
Most people don’t think of owning a target-date fund as “getting help,” but in a way, it’s like having a financial adviser: Over time, the portfolio becomes more conservative as its managers reduce stock holdings and increase bond and cash positions. About 50% of all 401(k) participants use these funds, which are often the default investments for employees whose employers automatically enroll them in the 401(k) plan; but only 17% use them in the way that the study’s authors think is optimal. (More on that a little later.)
Other forms of help are managed accounts, used by 12.1% of participants, and online advice provided through the plan, used by 5.4% of investors.
On average, managed account portfolios outperformed target-date funds by 0.5 percentage points a year, net of fees, the study says. Participants also save more in managed accounts—7.5% of pay, on average, versus 4.4% for those in target-date funds.
But that doesn’t mean managed accounts are right for everyone. Rob Austin, Aon Hewitt’s director of retirement research, says target-date funds often work best for younger investors, who are just starting out in the workforce and have yet to amass significant assets. Managed accounts, in contrast, often are best suited to those ages 40 and older with growing assets and complex financial lives. For such people, more customized help can make sense, he says. Online advice often works well for younger investors who are diligent savers and want more personalized advice than they can get from a target-date fund.
“As long as you use help in one form or another, you are going to come out ahead,” says Austin."
Summing Up
I'm convinced that going it alone, especially if we have a knowledgeable helper or friend, is the optimal answer for most individual investors over time.
And that's especially true after good personal financial habits are established, meaning simply that debt is minimized, and that healthy amounts of regular savings are being invested in a diversified basket of blue chip stocks (or in an S&P 500 Index Fund) consistently in a dollar cost averaging manner.
Knowing the long term history of stock investing will help individuals commit to buying stocks in both good and bad times, and enable us to achieve over time solid investment returns on an inflation adjusted basis.
If we start early and save consistently and in substantial amounts, time then becomes our ally and not our enemy.
The world for individuals is a 401(k) world now, and guaranteed pensions are rapidly becoming a thing of the past. And that need not be a bad thing. In fact, it should be a very good thing.
First, however, we need to make up our minds to take charge of and require "today's self" to commit to securing a solid financial future for "tomorrow's self." We owe that to ourselves and our families too.
So for those who are now squeamish about DIY investing, get started and work hard to acquire the knowledge that will cause you to do the right things for the long haul and still sleep well at night in the here and now.
And if that means getting a friend to help you get started down the road to acquiring the knowledge which will lead to long term financial security, do it.
It's simply the right thing to do. And if no help is necessary now or in the future, that will provide an even better return on your investment (of both time and money).
That's my take.
Thanks. Bob.
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