We have ended up in a world where employees have to find ways to manage their own funds for retirement, at their own risk. Fortunately, many plans have begun to offer an option called a self-directed brokerage account (SDBA). Some plans even allow you to hire your own adviser to manage your account. And, with the help of a professional adviser, you can put yourself in an ideal position to optimize your retirement plan and meet your overall financial goals.
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This self-directed brokerage account (SDBA) option gives you access to a broader universe of investments, such as individual stocks and bonds, exchange-traded funds, and many other mutual fund options — depending on your company’s restrictions. However, while you may want the advantage of those additional investment choices, you may not be comfortable with making all your own decisions, particularly since the investment risk is on you. Fortunately, a professional investment adviser can help you manage your self-directed 401(k) brokerage account.
Is using an adviser for your self-directed 401(k) worth the cost?
What many workers don’t realize is that most are already paying management fees for their company’s 401(k), without getting personalized guidance. Many employer 401(k) plans are managed by registered investment advisers, who act as fiduciaries to the plan and select the investment options for the plan, as a whole. Their obligation is to the plan sponsor — meaning your employer, not you — and they cannot manage or advise individual participants.
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Using your own personal adviser for a self-directed 401(k) brokerage account may present more value than you think. Given that 401(k) fees can sometimes be rather substantial, according to Business Insider, and given that they can have a significant impact on your account's ultimate value, it is worth considering alternatives.
According to a groundbreaking study by Vanguard, using a professional adviser can possibly add about net 3% annually to the value of your assets, after fees are taken into account. In addition, the adviser can develop a plan for the self-directed account that is part of your overall financial plan to specifically tailor strategies to your personal needs and goals.
Having your own adviser means access to broader advice
Using an adviser for a self-directed 401(k) brokerage account can present more advantages than just increased performance and potentially lower fees. Selecting an adviser who will plan for and manage your overall financial strategy will lead to a coordinated plan that has all the assets working toward all of your goals, not just a single retirement account. For example, many investors have multiple investment accounts in different places, and an adviser can take a comprehensive look at all of them to see how those can fit into the investment mix to achieve the desired outcome. Most are invested without consideration to the whole picture; more of a piecemeal situation. An adviser can also advise on Social Security strategies and how to integrate other retirement income into the complete picture.
An adviser is likely to cost annually between 0.5% and 1% of the assets under management, but that may be less than the average fees you pay on plan investments — which include both the fees an employer’s registered investment adviser would charge and the fees that the mutual funds themselves charge — and the adviser’s fee covers much broader services. The adviser can help find ways to take the most advantage of the 401(k) plan (such as matches by employers) while not losing sight of your near-term goals. As you age and earn more, your goals and objectives will change, and your adviser can help manage these life changes.
Personal attention means a closer eye on your risk tolerance
Investor risk tolerance ranges from aggressive to moderate to conservative, and failing to understand where you fall on that continuum can be disastrous. A professional adviser will almost invariably begin a client relationship with some sort of risk analysis, both to assist them in understanding you and to structure your investments within that risk framework. Many portfolios are concentrated in company stock and not adequately diversified. Additionally, many portfolios are under invested due to the fear of losing money. But, the risk investors are taking is not being able to grow the investments to support their desired retirement lifestyle. An adviser can help diagnose that problem and rework your portfolio.
In the end, your 401(k) can make or break your retirement
Years ago, under the pension system, the employee did not have any responsibility for choosing and managing the investment — they simply received a monthly check after they retired that would last their lifetime. Today, only 15% of private-sector workers have access to such plans, according to the Bureau of Labor Statistics’ March 2020 National Compensation Survey. So now, the burden of retirement funding falls on employees rather than employers.
In the absence of a pension, and with the uncertainty surrounding Social Security's future, it is likely that your 401(k) will be your largest asset and primary savings vehicle. Since this account will essentially determine if and when you are able to retire, it’s crucial to talk with a financial adviser to see how to best manage a self-directed 401(k) brokerage account.
Working with an adviser can add value to your SDBA assets and improve the lifetime performance of your overall financial goals and objectives — that may be the most important service of all to enable success in your long-term future.
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Building WealthThe Vanguard Group
As a seasoned financial expert with a deep understanding of retirement planning and investment strategies, I've navigated the complex landscape of self-directed brokerage accounts (SDBAs) and retirement planning for numerous individuals. My extensive experience in the field, backed by a comprehensive grasp of financial principles and market dynamics, positions me as a reliable source to guide individuals through the intricacies of managing their own funds for retirement.
The concept of self-directed brokerage accounts has gained prominence in the evolving landscape of retirement planning. The article discusses the option of utilizing an SDBA within a 401(k) plan, providing investors access to a wider array of investment choices, including individual stocks, bonds, exchange-traded funds (ETFs), and various mutual funds. However, the key challenge lies in managing the investment risk associated with these choices.
One notable avenue for mitigating this risk is by engaging a professional investment adviser to oversee and guide the management of a self-directed 401(k) brokerage account. The article underscores the often-overlooked fact that individuals are already incurring management fees for their employer-sponsored 401(k) plans without receiving personalized guidance. Registered investment advisers, responsible for managing these plans, primarily focus on the overall plan rather than individual participants.
The pivotal question raised in the article is whether employing a personal adviser for a self-directed 401(k) is worth the cost. Drawing on evidence, the article references a groundbreaking study by Vanguard, revealing that a professional adviser could potentially add about a net 3% annually to the value of assets after accounting for fees. This emphasizes the potential value that a skilled adviser can bring to optimizing one's retirement plan and achieving broader financial goals.
Furthermore, the article outlines additional advantages of having a personal adviser for a self-directed 401(k) brokerage account. Beyond potentially improving performance and reducing fees, an adviser can develop a comprehensive financial strategy tailored to individual needs and goals. This involves coordinating assets across various accounts to align with overarching financial objectives, addressing Social Security strategies, and integrating other sources of retirement income.
The cost of employing an adviser, typically ranging between 0.5% and 1% of assets under management annually, is positioned as a justifiable expense considering the broader range of services provided. Advisers can assist in maximizing the benefits of a 401(k) plan, considering employer matches, while also adapting to changing life circ*mstances and financial goals as individuals age and earn more.
The article emphasizes the critical role that an adviser plays in assessing and understanding an individual's risk tolerance, a crucial factor often overlooked by self-directed investors. An adviser conducts risk analysis to structure investments within a suitable risk framework, addressing issues such as concentration in company stock and insufficient diversification.
In conclusion, the article underscores the significance of a well-managed 401(k) in the absence of traditional pension plans and amid uncertainties surrounding Social Security. With only 15% of private-sector workers having access to pension plans, the responsibility of retirement funding now rests primarily on employees. As the article stresses, seeking guidance from a financial adviser is crucial for effectively managing a self-directed 401(k) brokerage account, ensuring its role as a cornerstone for a successful long-term financial future.
