John Oliver honestly and humorously ripped apart 401k plans and the institutions that provide them on his show this week. His biggest complaints are that there is no transparency to the client, high hidden fees, and that the plans are provided by financial advisors that are not fiduciaries. A fiduciary means that person is required to make decisions that are best for their client, not themselves or their firm. It is hard to believe that financial advisors could even be allowed to exist without being fiduciaries.
The department of labor recently came out with legislation that requires brokers to act in the best interest of their clients when selling retirement plans, which will be implemented next year. Finally.
Oliver continues to explain the best strategy to avoid foggy fees, crappy 401k plans, and sleazy financial advisors. His plan is to buy low-cost index funds, and move more of these funds from stocks to bonds as you get older. As a wealth advisor that prides myself on calling out financial predators and encouraging transparency in the market, I wholeheartedly agree with Oliver's complaints about the industry, the representatives, and his suggestion on creating a successful and low-cost plan. This article outlines exactly how to implement the plan that Oliver suggests.
Unfortunately, buying low-cost index funds in a 401k plan is an option that only some firms offer. This can be set up through what is called a self-directed 401k. This allows the employee to invest their retirement funds however they like, rather than being limited to the mutual funds on their roster. Being limited to a number of funds provided by a specific 401k plan is like a Monopoly. The employee is forced to invest in a money manager that may or may not be good, and may or may not be charging high fees, but they don't have a choice either way. The self-directed plan makes sense, because unlike other 401k plans, you will have the option of open architecture investing. Just like any other brokerage account, you can have the option to invest in stocks, bonds, ETF index funds, structured notes, options, alternative investments and more. Given the freedom to invest in what you prefer, you can choose lower cost products that have a higher upside potential.
There are a number of ways to find out if your firm has a self-directed 401k option. The first is to check on the 401k website. Once you login to your 401k online account, there would be an option one the site that says self-directed 401k. If you do not see this option on the website, the best way to find out about the plan is to call your 401k plan provider directly and ask if they offer a self-directed plan.
If your firm does offer a self-directed plan, the best way to about switching your plan is to call the plan provider and ask them to switch your plan to a self-directed plan. Once you have completed the paperwork, it is time to invest. Like Oliver said, for long-term investment, a wise strategy is buying low-cost index funds. Some examples of low-cost index funds are SPY, which represents the overall performance of the S&P, DTN, which represents the performance of 100 dividend-paying stocks, and PKW, which represents the performance of companies that have repurchased 5% of their stock in the past 12 months. I would also complement this strategy with high-quality stocks, and depending on your age, some high-quality bond funds or bond indexes.
The other option is to work with a fiduciary wealth manager that can advise you on your investments, and monitor them over time. While you will likely have to pay the advisor a fee for their services, the fee will be a transparent flat fee that is agreed upon before investing. Try to find an advisor that you trust and that has a focus on self-directed 401k plans.
As the department of labor sorts out issues related to 401k plans, like high costs and lack of transparency, it is comforting to know that some firms have been working with their human resources and financial partners to build plans with more transparency and flexibility, leaving the control in the hands of the employee.