Do I Need a Financial Advisor for My 401k

Financial planning may not sound very invigorating, but everyone needs it to secure a promising future. While you can set up a retirement savings account on your own, you can use a de facto plan to set up a comfortable future.

401 k plans have become the default retirement plan option for most Americans as many companies have refrained from offering default pensions. These company retirement plans make it feasible for employees to save for retirement via payroll deductions. However, most employees have to venture into the unknown by themselves when picking their 401 k investments and the amount they'll invest per annum.

While you can follow some personal finance rules on your own, a financial advisor might be able to assist you in making the best decision for comprehensive financial planning.

What is a 401 k?

Before anything else, let's go back to basics. A 401 k is a workplace retirement plan that allows you to save through payroll deductions automatically. As of 2022, you can make a maximum annual contribution of $20,500, while workers aged 50 and above can save an additional $6,500. Per year. The standard 401 k plan contributions are pre-tax. However, the Roth 401 k plans have allowed people to make post-tax contributions.

One of the main benefits of having a 401 k plan is potential employer matching contributions. This entails that the organization or employer you work for makes a matching contribution 0n your behalf. This amount depends on the amount you pay every pay period.

Here's an example: Let's say the company policy says they'll make a matching contribution of '50% up to 6%.' What does this entail exactly? The company commits to giving $0.50 for every dollar you put in, up to 6% of your eligible pay. In short, as you pay 6% of your income, the company will commit to paying 3%.

What exactly is a financial advisor?

In a nutshell, a financial advisor is a money expert that advises clients on decisions related to personal finance and wealth management. Not all financial advisors are the same. Every professional has their own line of expertise. Most advisors can help you with everything you need, including formulating a feasible retirement plan with a corresponding timeline. Some advisors specialize in answering questions about whole life insurance products and the like.

Here are some of the things an advisor can help you with:

  • Meet with you to reflect on your financial situation today as well as your future goals.
  • Develop a thorough plan that addresses your main financial concerns. These may include retirement planning, college tuition fees, insurance, avoiding estate tax, and the like.
  • Provide advice for financial surprises in your life.
  • Set up investment funds and accounts on your behalf.
  • Find you the appropriate financial vehicles, including mortgages or insurance policies.

As mentioned, not all financial advisors are the same. There are different industry credentials and designations. These include a CFP or certified financial planner, CFA or chartered financial analyst, and ChFC or chartered financial consultant.

The most popular one nowadays is the CFP. This designation is issued by a private trade association called the Certified Financial Planner Board of Standards (CFP Board). The CFP Board mandates the exams for qualifications and continuing education for certified specialists.

What life events can prompt you to seek advice on mutual funds and other investment options?

There are many reasons why people enlist the help of financial planners to achieve their goals. These events usually involve major losses or windfalls, or even major life events. Most people seek professional advice for the following scenarios:

  • You're almost retiring and you want to ensure you're on the right track.
  • You recently inherited some money from a relative and you need advice on investing that money.
  • You recently got married, and your spouse and you need help managing your finances as a couple.
  • You recently lost a spouse or got divorced. Thus, you need help moving on financially as a single person.
  • Your parents are getting older, and you need to help them manage their finances.
  • You just had a child and you want them to be provided for.
  • You hate investing and financial planning. You need professional help to ensure you don't mess up your future.
  • You enjoy the process of financial planning and investing, but you need a second opinion to improve matters.

What are the benefits of hiring a financial advisor?

A financial advisor can be helpful when you're confused, emotional, or simply do not know what to do to help you with financial security. Moreover, not everyone is concerned about investment strategies and can't see too far into the future. Thus, they don't really plan for it.

A good financial advisor won't just take your money and let them do the magic. A qualified advisor would ask you many questions, and most of them might be comfortable. This is to get a full picture of where you should lead your life.

A financial adviser can help you develop a plan and offer you feasible advice to hit your financial goals in the long run. These may include retirement planning, college education, tax liability, and the like. The extent of that advisor's knowledge can make you make better decisions.

A good advisor researches and compares different investment strategies before they use your money for mutual funds and other investment options. Researching these topics can be tedious and confusing, so you take a huge load off your back by enlisting professional help.

Moreover, if you enlist a fiduciary advisor, that person is required to act in your best interest. This provides you the assurance that your money is in good hands.

How can financial advisors help your 401 k?

To be fair, 401 k plans and other retirement plans provided by employers offer significant benefits. However, these plans usually do not come with valuable financial advice. This is why many employees wonder if it's necessary to have a financial advisor for their 401 k.

Here are some ways financial advisors can be of assistance to employees with a 401 k plan:

  • Select investment allocation. While most 401 k plans have limited investment options, choosing investments to help you meet your personal finance goals can be challenging. A financial advisor can assist you in allocating contributions that meet your needs and aspirations.
  • Comprehensive financial planning. A lot of investors have allocated savings outside their 401 k plan. Financial advisors can give you in-depth financial planning advice incorporating all your available assets, excluding the accounts they manage.
  • Make the most of tax benefits. When you're creating a financial plan, a financial advisor's advice can help you maximize your tax benefits. These benefits include choosing between a Roth or Traditional 401 k, your contributions per year, and when you should start withdrawing the money from every account.
  • Self-directed option. You can make select investments beyond the choices provided by the company if your 401 k plan offers a self-directed option. A financial advisor can give sound suggestions on other investment options that suit your goals and risk tolerance.

What are the downsides of having a financial advisor for your 401 k?

While there are upsides to enlisting a financial advisor for your 401 k plans, it's only fair to mention that there are certain disadvantages to this. Here are some of the concerns you should take note of when hiring a financial advisor:

  • You need to implement a strategy. While a financial advisor can provide you with some financial advice, you need to be the one to implement their recommendations. This is primarily because these people don't have access to the funds in your 401 k account. Moreover, you need to provide copies of your statement for them to assist you in monitoring your progress.
  • How will they be compensated for their services? Most financial advisors get paid based on a flat fee, commissions off products they sell, or a percentage of assets managed. The plan itself will not pay your advisor for that person's expertise. This begs the question of how they'll get paid. Because these professionals are not compensated for your investments, you have to pay them directly for their services. Some financial advisors go beyond planning for a 401 k plan and incorporating it into your overall financial planning. This is based on future rollover potential when you resign from your job.
  • Your investment options are limited. There are limits within a 401 k plan, which limits the potential benefits you can get from your financial advisor. Their ability to suggest alternative allocations may not improve your 401 k performance enough to offset the compensation you need to pay them.

Do I need a financial advisor for financial planning?

While some people choose to attain their financial goals independently, having a qualified financial advisor may be beneficial. A certified financial planner can be your soundboard for retirement planning and investment options. Moreover, they can be a steady hand that encourages you to maintain your game plan even when the market isn't looking good.

In addition, a financial advisor can help you incorporate your 401 k balances and other investments into your overall financial strategy. With all things into consideration, do you actually need a financial advisor?

While it may not be required to enlist the help of a financial advisor, many investors like you can stand to gain plenty of benefits from their professional help. By including your 401k assets, an advisor can assist you in developing a better overall financial game plan. If you fail to plan, you plan to fail. Plus, you spare yourself from many problems in the future if you have an expert who can make the most of your 401 k account through informed decisions.

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