Episode 17: Making the Most of Your 401(k)!

Isaac Wright: Glad to have you back here on Wright Money Tips. Today’s program is going to really focus on putting money away, painlessly easily into your retirement accounts specifically, 401(k)s and workplace retirement plans. The government, if you haven’t paid attention, is to trying to make it easier and easier for people to put money into these type of plans.
Now, granted, just because it’s easy for you to put money into your 401(k), doesn’t necessarily mean that there are some pitfalls that you don’t want to have happen when it comes to putting that money in from your payroll. So, today’s program, we’re going to really focus on whether or not you’re making some good decisions around your 401(k) or your workplace retirement plan.
And today’s guest is Ricky Lafon. Ricky, glad to have you. You and I have really had a lot of conversations, of course, we have a few years under our belt doing this, but at the end of the day for the people, whether or not they’re just putting money in their 401(k), maybe you’re at a point where you have a large nest egg and you’re getting really close to retirement, I think you’re going to want to take a few minutes here and pay attention to some things that we find in the 401(k) realm. And Ricky, I kind of want to start us off with what I would say is, especially for the people in the back end of their 401(k)s, or if they leave their employer, the decisions around leaving the money in the 401(k). Or does it make sense for them to take that money out of that old retirement plan and push that into an IRA or maybe even their current employer’s 401(k)? Let’s start us off right there and kind of hear what you have to say.
Ricky Lafon: Yeah, we run into this issue a lot and some of the issues with leaving it in the 401(k) where it’s at and you transition to a new job is just the human element of forgetting about it. It may be at a different custodian, a different website, and you just don’t log into it. If it’s not in front of you, you forget about it. So that creates some issues there. Plus, you may have some limited investment options as well. You may not be as fully diversified as you need to be for your retirement plan.
Isaac Wright: And you know, one other thing I want to say about this is maybe you have an old 401(k) where the fees on the investments, just to be devil’s advocate here, you may be in a very low fee situation. But in today’s world, you can basically roll that over to any custodian and probably find similar, if maybe not even better investment choices. Not to say it never makes sense, but it’s highly probable if you’re trying to keep organized and you’re trying to keep on top of many people today, change employers multiple times, from again a consolidation standpoint, still keeping fees understood and really keeping the plan understood.
Because a lot of times, if you’ve got a little money, you may not even think about using that money as part of your retirement. And I know that sounds a little nutty, but honestly, we see that people out of sight out of mind when it comes to some of those old plans. So, we wanted to start us off a little bit about that.
I think that’s a good point that you made as well. And maybe in the same vein, as let’s say, you’ve been with an employer a long time, you’ve accumulated a large amount of money with that 401(k), maybe you need to kind of consider whether or not it makes sense to periodically review and rebalance. That a lot of people with 401(k)s or retirement workplace plans, really sometimes kind of just dropped the ball with that. Why don’t you share a little bit about some insight and what we see when it comes to that?
Ricky Lafon: That’s a great point because if you forget to log into that and coordinate it with your new 401(k), IRAs and your other retirement funds, what can happen is if you start an allocation off your old 401(k), we even have clients that come to us and their buddy gives them an allocation and says, “Go ahead and invest in this.” They may leave it alone for three, five, sometimes even 10 years. Now they’re invested in something where they’re taking too much risk or more risk than they need to take to make the retirement plan work and they just have not logged into that and looked at coordinating that into a one-stop shop or one retirement plan, a holistic view as to what they’re doing financially.
Isaac Wright: You know, when you hear the word rebalancing and I think you would agree with this, some funds or some situations you’re told in the 401(k) that they’ll rebalance, like a target date fund. And to be fair, that may be a situation that does a little bit of rebalancing. I think probably in the grand scheme of what we see and many of you probably wouldn’t know this as well. If you look at your 401(k), most people have more than just one investment that they’ve chosen. And it’s important to look at that because you may have, and listen to what I’m about to say here, you may have a 401(k) rep, somebody that comes and talk to you about your retirement plan once a year. Listen, that’s better than nothing, but if you’ve accumulated some money in your retirement plan and you know, you’re going to have to start taking withdrawals from this money and you’re going to live on this money, I think a once in a year after work group conversation is probably nowhere near the level of advice that you would need when it comes to your personal affairs.
So, you know, Ricky, these are just things that I think is important to share because we see this a whole lot. And let me just kind of jump into it because, we said target funds and some people know what that is, and some people don’t. But maybe let’s discuss a little bit about why that can be what I would call a 401(k) mistake, is investing in a target fund. Why don’t you shed some light on that?
Ricky Lafon: Some clients will view a target fund and all a target fund is you pick the date of your estimated retirement and it’s designed to get a little bit more conservative as we get closer and closer to your estimated retirement date. But what we typically see is clients will choose a fund, multiple target date funds or multiple investments with a target date fund and now they start to have overlap in their investments. And there’s a fee for every investment that you choose within your 401(k). So now we’re getting more expensive to invest for the goal that you have for retirement.
That’s the reason you need a financial advisor to come in over top of that and say “Let’s look at your allocation. What are we really doing here? What are your goals? Let’s talk about what we need to invest in and make that as fee streamlined as possible.”
Isaac Wright: Also too, I think with target date funds, as you get closer to retirement, they try to make things more conservative. That’s also a tall order right now because not a lot of places to go on a conservative chassis where you can make some money and you start factoring in that target date fund fee, that could be a higher fee than otherwise you’re going out and maybe using something where it’s separates out the different allocations.
Ricky Lafon: Yeah, that’s exactly right. And this is a great point because what we talked about earlier, having limited options in the old 401(k), a target date fund is going to have limited options as well, where you and I, we have many different instruments at our disposal for a client to diversify risk on a risk adjusted level. So, when talking to a financial advisor, you can have more options than what your 401(k) can offer or something to supplement your 401(k) for your retirement future.
Isaac Wright: I liked that idea too. When you say supplement, because again, some of you have a 401(k) where you may be working and you’re not quite old enough to be able to move some money around outside of the 401(k). So, you may be limited in what you can do now. Again, you got to do the best you can, but make sure that if you are in a position, many 401(k)s allow you to be able to move money out of the plan at age 59 1/2. So, you may still be working another five or 10 years, but you have that option.
Of course, if you separate from your employer, you normally always have the option of taking out your 401(k) under most circumstances, not all, but most if you’re fully vested. So, just all of these things to keep in mind, if you have built up any money in a workplace retirement plan, that’s in the rearview mirror. Kind of this list of things that we’ve come up with, sometimes people need to understand the 401(k) who is the actual client. So, I’m going to leave it like that. Why don’t you talk to the listeners and the viewers today about what I mean when I say that?
Ricky Lafon: Yeah, a lot of people that are involved in a 401(k) and invest in a 401(k) think that they are the end client, and that’s not necessarily the case. Your employer is paying a custodian and that custodian has fees involved, not only for maintaining the plan and the tax forms for the plan, also the website that they provide for you and any advice that they give. So, they may actually charge the in-person a financial advisor fee for advice on the plan. And they think the plan is actually constructed there for them that are basically fee free because we don’t see the fees that are inside the 401(k).
That’s another thing we need to talk about because back in 2010, Congress was looking at putting legislation to actually put on a 401(k) statement, what your fees are. That actually got shot down because they feared people wouldn’t put more money into a 401(k) if they saw fees on their statement. That’s become problematic because as Americans, we pay billions of fees to a 401(k) company each and every year, without really knowing what the ramifications of those fees can be to our plan.
Isaac Wright: And I know right now, at least from a regulatory standpoint, transparency is a top line item. You would think that we may see a change over into that. And to be fair, a lot of employers have adopted some level of fee disclosure that’s a little bit easier to understand. But just know that your workplace plan, not necessarily is going to have you at the top of the table when it comes to who they are beholden to.
Final thing. I just want to say, as we wrap this up. Assuming your fees and costs are minimal, and you don’t see those on the statement. Ricky, I guess, what is your takeaway with what I just finished saying from your standpoint, when you’ve seen a 401(k)s. I guess, what have you found when it comes to, let’s call it the transparency of the fees before we wrap up?
Ricky Lafon: We haven’t seen a whole lot and we try to do our best, our due diligence on the back end to see what those fees are. And then we actually take that extra step where we call into the custodian of the 401(k) with our client on the line to find out exactly what fees are inside that per investment. Is there an annual fee or a quarterly fee? Or are there fees for statements or access to the website, so on and so forth.
And if we can find out that information, we can make better decisions with our clients on where to invest the money, how to allocate the money to make sure they’re always put in the best position possible.
Isaac Wright: Also keep in mind for all of you that have a workplace or 401(k) plan. You can normally go to the website and you can pull a document called the summary plan description and that really does help you get a more detailed look at your fees, possibly all of your investment options, some of the other administrative things that happen inside of that 401(k), when you can take money out of your 401(k), hardship withdrawals, lots of let’s call it moving parts. And all of those plan descriptions can be very different from employer to employer.
So again, the technical knowledge around how to be able to manage and maintain your retirement assets, if you have any concerns, questions, and a lot of you have an advisor and if you do, great. And if you don’t, if you don’t have somebody that you feel connected with, let us know, we’re here to help. Ricky and I both for the years that we’ve done this, I feel like when people walk into our door, they feel pretty confident and comfortable about what we’ve been able to put together. So, overall, as far as having a fiduciary that has your back to make sure that you’re getting your plan in order, these are things that, right now, as all of you, probably have the largest amount of money in your retirement plan that you’ve ever had because the market has been so good for 10 plus years. You know, try to avoid some of these mistakes that we’ve talked about today.
Ricky, I’m glad to have you on the program as always, and I know we’ll be doing it again soon. So, I look forward to seeing you and for all of you, thank you for tuning in to Wright money tips, and we’ll talk to you soon.
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