Unhelpful Advice
Provisio Retirement Partners
Finances are complicated. Advice shouldn't be.
In the world we live in, we are constantly bombarded by information. We can no longer simply escape the information overload by turning off the TV and putting down the newspaper. Our smart devices have become an integral part of our personal and professional lives whether we like it or not. With that comes the opportunity for us to be subjected to some extremely unhelpful (dare I say silly?) financial “advice”. Today I want to take a moment to debunk a few of the most egregious examples of unhelpful advice that I have come across lately.
Skip the 401k Contributions
In a recent Forbes article , a financial advisor contributor (and a CFP or Certified Financial Planner I might add) urged his readers not to follow the general consensus opinion when it came to several pieces of financial advice. Specifically, he informed his readers to not “be swayed by the idea of free money” and skip the 401k contributions and employer match in favor of making max contributions to their Roth IRA. He goes on to say that he believes, “you can make more money by educating yourself on how to actually invest and opening up a Roth”.
There are a few key things wrong this assertion. For starters, 401k plans have a full lineup of investment options for investors to choose from. While there are default investment options (typically target retirement date funds or portfolios), the “educated” investor does normally have other options to choose from. Secondly, many, if not most, modern 401k plans have a Roth provision which allows employees to make contributions to the plan on a Roth basis. Regardless of which option an employee chooses, they are still able to contribute up to the maximum contribution limit for 401k plans which is much higher than in a Roth IRA. In addition, recent legislation has made it possible for employers to make matching contributions on a Roth basis as well. If the argument is between pre-tax vs. Roth contributions, then the writer does not really have a leg to stand on.
Lastly, and maybe most importantly, the premise that “educating” yourself on investing in a Roth IRA can and will lead to outsized returns exceeding what you would see in a 401k with an employer match is completely false. To illustrate this, consider an example with me. Let’s assume your employer offers a 401k with a contribution match of up to 3% of your income. The match is dollar for dollar which means that if you contribute 3% of your paycheck to the 401k then you employer will match your contribution with an additional 3% for a total contribution of 6% of your income being contributed to the 401k. It doesn’t take a genius to realize that what you are effectively receiving here is a 100% return on your investment simply by way of the employer match. Add to that your investment returns over time and it becomes an insurmountable task to achieve higher returns in your Roth IRA – no matter how educated you are!
Always Rollover your 401k
As licensed financial advisors we are prohibited from advising a client or prospect to rollover their 401k or similar employer sponsored retirement account. Instead, we must educate the individual on all of their options in order for them to make a well-informed decision. Often, this does mean that the client rolls over their account but not always! This regulation applies to anyone who holds a securities (i.e., investment) license and provides financial advice for a fee. Importantly, no such regulation exists for those professionals who hold a life insurance license but not a securities license. This is where a conflict of interest can emerge.
Imagine you are a handyman hired to repair a leaky faucet. The only problem is, the only tool you have with you is a hammer. In fact, the only tool you own is a hammer! When all you have is a hammer, every problem looks like a nail. Now I am no handyman (as my wife could attest) but I think it would be pretty difficult to fix a leaky faucet with only a hammer. Applying this example to my point earlier, if you are only licensed to sell insurance, then you will tend to view insurance as being the solution to every problem. I have written about this in depth in another blog post which you can find here .
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Suffice it to say that there a several prominent individuals on the radio, TV, and on billboards that are licensed in insurance only and thus give the advice that 401k plans are an inherently bad investment. Therefore, they suggest, all 401k dollars should be rolled into a specific type of annuity (an insurance product) upon retirement. This advice is given without consideration to the potential negatives of moving money into an annuity vs a 401k because, again, the insurance professional only has the one tool in their tool box. Rolling funds from a 401k plan into an annuity product is not an inherently bad decision but it should be weighed against the alternatives and considered in light of the individual’s needs. I find it hard to believe that this level of due diligence is being conducted in these situations which makes this advice more than a little unhelpful.
“Crystal Ball” Advice
In times such as these it is very common for me to field questions about the state of the market. Usually, those questions are simply, “what do you think the market is going to do now?” My favorite answer is simply, “well, I don’t have a crystal ball!” Obviously, I have some thoughts about the direction of the market but I don’t claim to know exactly what is going to happen next. I much prefer to help clients focus on the things they can control, namely, their goals and investing behaviors. In the long run this is far more important than what the market does in any given year much less on any given day!
I say this because any time the market begins to get volatile the economic forecasters (both amateur and professional) come out of the woodwork with their 1-, 3-, 5-, and 10-year projections! Sometimes these prognosticators of the market have some good thoughts but more often their glimpses into their “crystal ball” are unhelpful for the average investor. I jokingly told a friend of mine over dinner last night that, “anyone who says they know the future is trying to sell you something!” This was meant to be humorous but there is a ring of truth to it. Individuals who make claims about the economic future are often looking to sell you their advice, products, or even simply their professional legitimacy. The bottom line here is to focus on the things about your finances that you can control instead of trying to took a look into the “crystal ball”.