Who'll Coddle Your Nest Egg?
Are you getting the right advice about your 401(k)? Are you getting any advice at all? These questions are even more important if you hope to retire early. You need your company retirement account to earn as much as possible as quickly as possible, but at the same time you can't afford to take big risks with your departure date looming sooner than ever.
The inherent conflict between those two investing goals is pretty hard to handle on your own. It's one reason more employees are hiring outside advisers to help them manage their 401(k)s, says David Wray, president of the Profit Sharing/401(k) Council of America.
These personal planners offer much more customized attention than the educational material, interactive Web sites, 24-hour help lines, and even third-party consultants such as Financial Engines and Morningstar (MORN ) that many plan sponsors make available to their 401(k) participants.
For example, many company advisers will suggest lifestyle or target funds, that automatically change your allocation from stocks to more stable bonds and cash as you near retirement. This setup "may be fine for 70% or more of employees," says Jim Kruzan, head of Kaydan Group, a Clarkston (Mich.) firm that specializes in 401(k) and retirement planning. "But an early retiree probably shouldn't have much invested in cash just as he's about to leave the company. A good chunk of that money has to last another 30 or 35 years, so the portfolio still needs plenty of growth."
Kruzan applied this logic to the portfolio of Susan Bloomfield, a 58-year-old who works in quality assurance at General Motors' (GM ) Baltimore hybrid plant. She took the details of her 401(k) to him soon after she got divorced in the late 1990s. Back then Bloomfield was living in Michigan but dreamed of retiring early and owning an waterfront home. Kruzan helped her pick an aggressive but diversified mix of mutual funds to try to achieve those goals. In many years, she says, she achieved double-digit returns.
The house part of the dream came true when GM transferred Bloomfield to Maryland in 2004. She restored a shore house on the Chesapeake Bay, then built a 70-foot pier for her Pierson sailboat. She plans on retiring from GM later this year—her 30-year anniversary with the company. "I'm living my dream," says Bloomfield. "I can walk out my door and sail anywhere in the world."
Bloomfield gives Kruzan most of the credit, particularly because his advice kept her whole during the 2001-02 market downturn. "I was down a little but nowhere near as low as some of my colleagues who were concentrated in tech and weren't well-diversified," Bloomfield explains. "If I had taken a bath back then, I would never be here now."
Kruzan has counseled hundreds of GM employees, so he is well versed in the particulars of that plan. However, not all private investment advisers are expert in 401(k) management. With such plans, they must work within the confines of an employer's preselected funds. What's more, the assets are not under their direct management. Also, because most advisers take a percentage of assets under management as their compensation, they may be less likely to follow the plan closely. Savvy advisers will often charge an extra fee for 401(k) help, or if they are already working with you on taxable accounts and INDIVIDUAL RETIREMENT ACCOUNTs, they'll advise free of charge, hoping that when you do retire and roll over the money, they'll gain control.
If you're thinking of springing for a 401(k) adviser out of your own pocket, use these questions to help find one who's right for you:
HOW WELL DOES THE ADVISER know your plan? Ideally the person should be familiar with or willing to learn about how your 401(k) works and the investment choices available. Recently, for example, in an effort to simplify its 401(k), GM dropped about 20 fund choices. As soon as Kruzan found out about the change, he suggested to each of his GM clients which funds to transfer money to inside the account and what to do outside of the plan to make up for the change. You want an adviser who reacts quickly to any revisions.
HOW WILL YOUR ADVISER find the right investment mix for you? Smart asset allocation and consistent rebalancing are the main investing strategies that can make early retirement a reality. "To gain the returns you need and keep risk low, you want to be spread out among 12 or 13 asset classes," says Dawn Bennett, chief executive of Bennett Group Financial Services in Washington. "You wouldn't want your whole portfolio in microcaps, obviously, but you also don't want to miss even a little bit of the gain if that sector takes off."
Your adviser also has to look at the big picture, making sure your 401(k) allocation is working with the rest of your assets. "We constantly see people holding the same funds in their IRAs that they have in their 401(k)s," says Pete Bush, with Horizon Wealth Management in Baton Rouge, La. "That's the first thing we work on." Another common mistake: holding tax-advantaged funds in a 401(k) and funds with high capital-gains distributions in a taxable account, instead of the other way around.
HOW CLOSELY WILL THE ADVISER monitor your plan? Through the Internet, 401(k) investors can keep an eye on their account daily if they so choose. Your adviser should be watching regularly, too, and sending you alerts if you need to rebalance or make other changes. The adviser can best stay informed if you hand over the password to your account or, at the very least, forward your monthly statements. In most cases, advisers do not actually make the trades, but rather notify you, then follow up to be sure you've pulled the trigger.
By Walecia Konrad