401(k) advice worth paying for

My individual 401(k) investment advice clients pay around a 1% annual management fee. They have the very real expectation that my advice will yield far more than it’s costing them each year.

But how would they know?

There are two ways to calculate a quantifiable measure of 401(k) investment advice. The combination of each calculation provides the answer to the question.

“Is the annual fee I pay for 401(k) advice worth it?”

The first calculation is on annual investment performance. Most individual 401(k) investors do not realize this calculation has two parts.

First there is the upside. The calculation begins with this question. Did the 401(k) mutual funds I own provide extra investment performance? Greater than other mutual funds available to me?

Here is another question that will arrive at the same answer.

Did the 401(k) mutual funds I own provide more investment performance than the U.S. stock market averages?

This update calculation is easy. The 401(k) mutual funds you own either “outperform” or they don’t. These mutual funds are in the top handful of your default 401(k) mutual fund options, or they are not.

I ranked all the default 401(k) mutual fund options for my clients. I only tell them to own the highest ranked mutual funds available. In a rising stock market environment.

The second calculation is often overlooked. And is a bit trickier to calculate. But no less important the upside investment returns.

This is the downside of investment performance calculation. This measurement has become much more important the last few months.

Did the 401(k) mutual funds I tell you to own hold their value better than the popular U.S. stock market averages?

Asked another way, did these mutual funds do a better job of preserving your 401(k) principal value?

Many of my individual 401(k) advice clients survived 2022 in good financial shape. The 401(k) mutual funds they owned went down in value. But not as much as the benchmark S%P 500 index. It lost more than 18% last year.

I would get fired my many of my 401(k) advice clients. If they hold on to 401(k) mutual funds that closed down over 18% in one calendar year.

In fact, I would resign from that client. Tell him or her to look for another investment advisor.

So, there are two calculations involved here. To determine the true value of 401(k) investment advice. And upside calculation. And a downside calculation. The sum of both calculations should answer the question of the value of 401(k) investment advice.

Ric Lager
Lager & Company, Inc.

MEET THE AUTHOR

Ric Lager is a Registered Investment Advisor specializing in 401(k) advice. He helps 401(k) participants improve their mutual fund decisions. The 401(k) SDBA (self-directed brokerage account) is a large part of his practice.

Ric provides independent, third-party fiduciary investment advice. He does not sell 401(k)'s. Ask him about the dollar cost of owning the wrong mutual funds in your 401(k) account.

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