I have a 401(k) plan with my employer. Today the financial advisor overseeing our 401(k) plan and representative from the financial company that manages our 401(k) plan came to our office. I signed up the one-on-one meeting with them. the reason I signed up for the meeting is because I never deal with a financial adviser face to face. And frankly speaking, some advises they gave during the meeting are helpful and the other are not depending on each individual's preference and life goals.
The overall impression to me from the meeting is that if you are not savvy enough for personal financial and investment, you could be misled. That is perfectly tangible under the current law. Under the law, the advisers need only to provide the reasonable advices which may turn out not to be the best for a client. And that is a reason why Department of Labor is trying to revise the law to let financial adviser provide the advices in a client's best interest.
First of all, I should give the financial company kudos for coming up with an online tool on its website that helps guide people to save for retirement. And again, the tool is limited to the planning and investing for retirement, so the advisor and representative in the meeting did not have enough time to make sound advises based on my overall financial picture.
They looked at my income, contribution to my 401(k) and assets in other retirement accounts - in my case, they are Roth IRA. They helped set up my ideal monthly retirement income level as a percentage of my current income level. It is 70% by default which I accepted. Then they found there is a huge funding gap between my current assets and ideal retirement income.
I contributed most of my retirement savings to my Roth IRA and contrarily very little to my 401(k). the representative asked me why. I said I like the low cost index funds available in IRA while there are no index funds in the 401(k) plan. The difference in the annual manage fee is about 0.5% between an average index fund in my IRA and an actively managed fund that I hold in my 401(k).
Then the advisor jumped in saying that I should consider more pretax contribution to 401(k) because the tax saving upfront. He illustrated for every dollar I contribute, I only pay 70 cents out of my pocket, assuming income tax rate of 30%. He said that move will cover the savings I can have with index funds in Roth IRA. Of course I will have to pay the tax later when I withdraw the money, he added.
The representative and the advisor mentioned there is a stable fund offering 3% annual return in my 401(k) which I should consider if I would add more fund into my plan. They followed by saying that every investment tool comes with a cost. There are costs for stable funds and for CDs as well.
The advisor also suggested me to consider other funds than the only funds that I invest in my 401(k) because the past performance over 5-year period of those funds are higher than the fund I hold.
Are their reasoning and suggestions all making sense? It depends on a personal view on investment. Let me continue to address my opinions in the following post.
