Do not hire a financial adviser until you do this

Many advisors and financial institutions want to manage your 401 (k) account after you leave. I am. Of course, they will charge you for this service, so you need to ask yourself if you will receive a good value for the charges you will pay.

Many advisors charge a certain percentage of their assets under management. Usually 1 percent per year. This fee is typically in addition to investment costs associated with investment trusts and / or transaction costs associated with trading individual securities. 1 percent seems like a very small number-it can't really make a big difference. Wrong.

Let's look at an example that shows how much money you will pay if you pay a 1% commission on an asset.

Suppose you've just retired and have a $ 500,000 in your 401 (k) account (this is the minimum for many advisors to accept your business). Forehead). Now suppose your advisor charges 1% a year and invests in a low-cost investment trust with a fee of 0.25% a year (25 basis points for jargon investment). The all-in-cost in this situation is 1.25 percent per year, or 125 basis points.

Also, I was working for a large employer offering a low cost investment trust in a 401 (k) plan and only left an account with my previous employer. Let's say. In this case, the employer's funding is also assumed to cost 0.25% per year, so the total cost of this option is 25 basis points. Even if your

401 (k) plan doesn't offer such a low-cost fund, you can still find funds at equal or lower costs in companies like Fidelity, Schwab, and Vanguard. Near 10 basis points.

Now let's make another assumption. In other words, the investment makes 5% annual return before deducting costs. Let's take a look at the amount of money that will accumulate after 10 years in these two scenarios, assuming you did not make a withdrawal.

• For investment advisers, the annual net rate of return is 3.75%. (5 percent minus 1.25 percent). In this case, after 10 years, $ 500,000 is worth $ 722,522.
• If you leave money in your employer's plan, your net return will be 4.75% (5% minus 0.25%). In this case, your $ 500,000 is worth $ 795,262 in 10 years. That's $ 72,740 more than working with an investment adviser.

Financial adviserquickly pointed out that this example is unfair, as investing can increase the value by increasing the rate of return. May do. The problem with this discussion is that there is plenty of evidence that most active managers indo not exceed the benchmarkindex over time. Therefore, after considering all costs, it's really hard to claim that a large employer's 401 (k) plan can beat a low-cost index fund.

However, financial advisors can add value in other ways. For example, it helps determine the right amount of risk associated with an investment, it helps reduce taxes paid, it helps reduce debt, it helps budget, it helps you choose retirement income, strategies, markets. Stay there to calm your fears when is collapsing. These are just a few examples-there are many more.

But can you buy such help for less than $ 70,000 in 10 years? And do you have to pay them every year for these services?

Let's say you hire a financial adviser who charges $ 300 per hour (perhaps at the maximum price). Also, let's assume you need to spend 10 hours a year with him to review your situation. You will pay $ 3,000 a year, or $ 30,000 in 10 years.

You need to spend 233 hours to earn $ 70,000 in 10 years. Unless it's a very complicated situation, that doesn't seem to be the case. In that case, you can get enough value. For that money.

The calculation in the above example gets worse if:

• Advisor charges 100 basis points or more
• Advisor charges 25 basis points or more Use funds
• Invest over 10 years
• $ 500,000 in savings Fortunately you can join a 401 (k) plan with more than
• 25 basis points, or your own money smart enough to find such a thing.

This is just one example of the last point. TheFederal Savings Plan(TSP) for civil servants offers an average of 2.9 basis points of investment. For most civil servants, sending money from TSP doesn't make sense-it's one of the best deals around.

On the other hand, I've seen a401 (k) plan for a small employerthat costs more than 150 basis points. In this case, it would be strange for most people to leave money in the plan.

Even if you save far less than $ 500,000, you can save thousands of dollars by paying less for your investment. In the above example, if you save $ 100,000 instead of $ 500,000, you can save $ 14,548 in 10 years by paying 25 basis points instead of 125 basis points.

So if you decide to keep your money in your employer's plan, but you also need financial advice, what can you do? There are several options. You can find financial advisers who charge on an hourly basis, such as those who work for

Garrett Planning Network. In addition, many 401 (k) plans use services such as Financial Engines to provide professional advice. , Usually at half the cost of a retail advisor.

The bottom line is that a few percent of the cost can make a big difference over time. Before deciding what to do with your money, you need to determine the cost of your 401 (k) plan funds and compare it to the cost of your financial adviser or institution considering investing. All 401 (k) plans aren't too difficult, as you currently need to disclose afunding fee.

It is common sense in the United States to ask how much you will pay for the services provided and to make sure that you are getting the best value from your hard earned money.

Steve Vernon

View all Steve Vernon articles on CBS MoneyWatch »
Steve Vernon is a large employer designing a retirement program for over 35 years. And supported the management. Consulting actuary. Currently, he is a researcher at the Stanford Longevity Center, helping to collect, direct, and disseminate research that improves the financial safety of older people. He is also the president ofRest-of-Life Communicationsand offers retirement planning workshops,Retirement Game-Changers: Strategies for a Healthy, Financially Secure and {104. } Fulfilling Long Life and Money for Life: Turn IRAs and 401s (k) into Lifetime Retirement Salaries