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Your 401K is Broken! Thumbnail

Your 401K is Broken!

Your 401K is Broken!

Yes, you heard that correctly. YOUR 401K IS BROKEN. Did you know historically, the S&P 500 has averaged a return of approx 10%? Did you know over that same period of time the average investor in a 401K has averaged a return of only 3.9%?

How could that be? Why is my 401K only returning 4% when the market has averaged 10%. One word. EMOTION. Emotion drives investors to make terrible decisions. Just go back to when you were a teenager and you were "in love." All those decisions you made then probably seemed like the right choices. However, with 20 plus years of hindsight, most of us can see that all of those decisions weren't good ones and almost all of them were based on emotion.

Emotion is Driving Your Decisions.

Emotion drives the average investor to buy the latest, hottest investments after they have peaked and then they sell the investment after taking the ride all the way to the bottom. Everyone has heard the phrase buy low and sell high, however very few 401K investors do this. Many commit the cardinal sin of buying high and selling low without even realizing it. Their decisions are based off emotions and not reality.

Do You Actually Know How to Manage Money in Your 401K?

Let's take a realistic look at a 401K. Most employers offer one to every employee. However, most employees have zero training on how to actually manage money based on their age, goals, retirement plan etc. 

Would you take a free car from your employer with the only stipulation being that you have to do all the maintenance and repairs on the car for the entire life of the car? Yes, we would all take that deal, but some of us can actually do car maintenance, but many of us have no clue how to even change the oil!  And for the first several years of owing that car it will run fine, but as we neglect repairs and maintenance over time that car will start performing poorly. And in many cases, it will stop running all together.

I make this analogy to prove the point that, without training, a 401K can actually be a detriment to your retirement plan. Without proper training, you can totally derail your retirement by not managing your 401K correctly.

Here is the good news. You don't have to do it alone.  Most employers won't tell you this and most HR managers are literally unaware of this. It's really not their fault, they don't know what they don't know.

You Can Hire an Adviser to Manage Your 401K.

Here's how. Many employer 401K plans have an option within that plan that is called a Self Directed Brokerage Account (SBDA). This option allows an investor to invest in many other types of products outside of the 10 mutual funds they you currently have access to. This option also allows you to work with an adviser to help you manage the invest within the SBDA.

The SDBA is very similar to traditional brokerage accounts. Employers that offer the SDBA option allow the employees to transfer a portion of their investments from the Core account to the SDBA. Through this account employees have access to investment choices such as mutual funds, stocks, bonds and access to professional investment advice through a Registered Investment Adviser.

A recent report from Charles Schwab might give retirement plan sponsors reason to think about offering their participants a self-directed brokerage account (SDBA), particularly one that offers the participants the service of an adviser.

Schwab’s “SDBA Indicators Report” found that while only 20% of participants in a Self Directed Brokerage Account worked with a Financial Adviser, the average balance of their 410K was nearly twice as much as the accounts held by non-advised participants. You need to read that aging. Twice as much!

I'll Just use a Target Date Portfolio.

This is sort of the default choice for the average 401K participant. They throw 100% of their contributions in a Target Date Portfolio. What the heck is a Target Date Portfolio?

By definition, a TDF is a fund of fund model that invests predominantly or exclusively in mutual funds with a certain maturity or specified date in mind, typically the time at which a participant is planning on retiring. Because TDFs are designed to change their allocation and objectives over time, it is important for investors to revisit their investment selection periodically to make sure that the investment selected is consistent with their goals, objectives, and retirement strategy.

TDFs are not guaranteed and past performance does not guarantee future results. Don’t settle for a generic TDF that was designed for millions of participants when you can determine and create your personal retirement date portfolio. With advice from the adviser you trust, you can have comprehensive investment management and cohesive financial planning in your company retirement plan.

How Do I Hire an Adviser to Manage My 401K?

Contact 80/20 Financial Services today to see if this is something we can help you with. If your 401K plan offers the SBDA option chances are we can help you. We are a full service Financial Planning Firm that specializes in Retirement Planning and Investment Management.

You don't have to maintain and repair your 401K plan on your own. Contact a certified 401k mechanic today!

Thanks for Reading!

Brian Coleman/Retirement Planner and Investment Manager