There’s a battle brewing for your retirement savings, and it’s shaping up to be a doozy. Billions of dollars each year roll out of company-run 401(k) plans and into personal IRAs, increasingly directed by retirees themselves. Do it yourself investing is the new “normal.”
Who wants a piece of that money? Well, your old 401(k) plan would like to keep it, of course.
That’s what led to a recent federal study, put out by the Government Accountability Office, warning the public that the plans often attempt to steer workers directly into IRAs they run, thus maintaining their hold on fees charged.
The problem isn’t so much that their own IRAs are bad, but that workers don’t realize that they have choices, the GAO explained: Keep it in the 401(k), put it into a new employer’s plan, roll over into an IRA run by the same firm or a competitor, or (by far the worst choice) cash out.
Rollovers are a fast-growing part of the market, estimated to hit $450 billion by 2017, up from $315 billion last year, reports The Wall Street Journal. As a result of this wave toward IRAs, the Journal writes, more people are attempting do it yourself investing, rather than hire a financial adviser.
Most money is still managed by advisers and 401(k) plans, according to Cerulli Associates, $18.2 trillion in 2011 compared to $4.2 trillion through online brokers. But the do it yourselfers are on a bit of a rampage, stung by high fees and a feeling of mistrust.
Considering being your own adviser? Worried about messing things up? Here are some fundamental questions to ask before trying do it yourself investing:
1) Do you care enough to learn about investing? This is a major stumbling block for many retirees. After decades of allowing a mutual fund or 401(k) plan manage their money, they are forced in retirement to take a crash course in do it yourself investing. Some are ready and willing to take on this learning curve, and some clearly are not. Decide who you are.
2) Are you doing this alone or as a couple? It’s crucial for couples to share the burden and the responsibility of knowing how their shared savings will work as a long-term income source in retirement. If only one person in the relationship is involved, then do it yourself investing risk to the other person is quite high if a spouse dies or becomes incapacitated.
3) Are you confident in your emotional ability to manage money? Early on, investors can afford to ignore “volatility,” the tendency for investments to rise and fall in value. If you have decades to go until retirement, the day-to-day value can seem irrelevant. Generally, too, good long-term investments can be volatile in the short run. Once retired, however, volatility can lead to poor decision-making, emotional trading and panicked choices. Understand where you are emotionally before you take on do it yourself investing.
4) Do you understand what fees you should pay? The reason all the brokerages and advisers want your retirement accounts so badly is, very simply, they will collect ongoing fees for managing your money. Very high fees are sometimes sold as evidence of exclusivity or skill. Nothing could be more backward. If you don’t know what fees you pay and nobody at the firm will explicitly say the number to you, that’s big trouble.
5) Do you have complex tax and estate situations to consider? Financial advisers do have an important role to play and they can add value. For instance, properly choosing from the different types of IRAs (taxable, tax-deferred, Roth or a combination), managing income for survivors and investing for heirs. You can buy that advice à la carte from most good advisers, what is known as “fee only” service.
Being confident in your money management skills is important all through life but especially as retirement nears. So is knowing when to seek help with do it yourself investing, and knowing the appropriate price to pay for any service you choose to engage.