When you leave your job and need to decide what to do with the retirement savings you’ve built up through the years, you have several choices: you may be able to keep the money where it is, you can roll over your 401(k) to an IRA, or you can cash it out. There’s a lot at stake – your decision could make or break your financial future, including the decision about who to turn to for advice.
If you roll over your 401(k) you’re really all on your own to decide where to set up your new IRA account, and you face decisions that may look like one big blur of brand name banks and brokerage firms. With so many IRA administrators and investments to choose from – and a wide range of fees that can eat away at your returns, with some less obvious than others – you need to keep a laser focus on your options. At this moment you essentially become your own financial advisor, and depending on the decisions you make, you could seriously damage the life savings you’ve taken years to build. It’s like walking out of your office with a giant bag of cash. What you do next will make a big impact on your future.
This is the moment to stop, take a breath and take the time to get it right. It could also be the time to hire a professional advisor who will walk you through the process of rolling over then reinvesting your retirement savings. But trusting the wrong person for this important rollover advice can put your savings at risk. Unfortunately, the financial advice industry does not make it easy to find fiduciary advice because the industry is made up of mostly brokers and commissioned advisors. Many are out trolling for potential clients as they are leaving their jobs and about to roll over the bulk of their retirement savings to new individual retirement accounts.
Advisors who work for commission are sales reps who are incentivized to encourage you to transfer your money into high-commissioned funds or insurance contracts that often cost you thousands of dollars a year, and over many years, add up to hundreds of thousands of dollars in sales kick-backs that you may not realize are going straight to your broker from your savings. Those commissions can easily be 2% or more of your total investments. With your life savings at stake, this is why it pays to understand the difference between choosing to hire a fee-only fiduciary advisor – one who does not get paid to sell investments but someone in business to advise and acts as fiduciary all the time, not just some of the time. An independent fiduciary advisor is required by law to put your financial interests first, and not their own.
When you’re about to roll over your 401(k) or 403(b) money, this isn’t the time to rush into hiring the first available financial advisor or settling for a mediocre experience. An excellent advisor is collaborative and will educate and advise you on which investments match your timeframe and your personal circumstances. The advisor will seek out low-cost discount brokers such as Schwab, Fidelity or eTrade to serve as your custodian as well as investments at the lowest possible expense to you so that you can enjoy the highest possible investment returns.
Holistic fee-only advisors also provide tax planning and strategies that can help you save even more money – such as taking advantage of the opportunity to roll over money from a traditional IRA to a Roth in years when your income and tax rate are low, which can help you build tax-free savings for the future. The advisor may also be able to give you access to special versions of the mutual funds that have even lower fees than you’d pay if you were investing on your own.
You can work together with your advisor over the next several years to make the most of your retirement savings and work towards your goals. And the advisor can also be there to help you make decisions when it’s time to withdraw the money in retirement, and make choices that can help you stretch the value of your account long into the future.
How to pay a fee-only advisor for their guidance on 401(k) rollovers & more
But how do you pay a fee-only advisor’s fee? Advisors vary in how they charge based on the scope of the work, complexity, and total time spent on each individual’s case. Sometimes financial planners will charge an hourly rate or a project fee, while others work on a flat fee or annual retainer fee basis. Many advisors who provide both ongoing planning and portfolio management charge their fees based on a percentage of the assets you’re asking them to manage. A good guideline is that advisor fees equate to 1% (or less) of your total assets.
It’s common for clients to start the fee-only advisor relationship by paying a flat fee or yearly retainer for the ongoing financial planning and advice, then giving your advisor the responsibility to manage your portfolio so he or she does the regular chores such as rebalancing your asset allocation or tax-loss harvesting.
“Advisory relationships are based on trust,” says one fee-only advisor within the Wealthramp network. “Trust takes time to develop. By doing a financial plan first or working on some kind of retainer basis where you are not investing assets per se, is a great way for clients and the advisor to get to know each other.” In other words, trust is built by collaborating.
And whether you’re looking for immediate advice to roll over your 401(k) or ongoing long-term guidance for growing and preserving your savings, don’t settle for anything less than an advisor you trust.
YOUR ADVISOR IS STANDING BY
Consider getting extra help. With so many changes to your taxes and your finances, this may be the year to get extra help from a financial planner. A fee-only fiduciary financial advisor can offer expert tax planning as well as help you set your financial goals and priorities – so you can take advantage of all of the tax breaks you deserve and make the most of your financial-planning opportunities.
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