Unraveling Your Retirement Savings Options


March 28, 2017

Times have changed. Gone are the days of the bespectacled, white-haired gentleman wearing a three-piece suit, placing a comforting hand on your shoulder and saying, “Trust me, we will take care of your retirement.” Today’s investor is savvier. Caution is abundant after Y2K, Bernie Maddoff, the Financial Meltdown of 2008, etc. Despite some harrowing events over the last few decades, investment services are seemingly limitless, as is up-to-date information. This leads to the big question: What is the best fit for your retirement savings options? We’ll review some of the primary options and explore aspects of them you may not know about.

Making the Most of a Company Plan

Many people start their investing in a company-sponsored plan. There are several variations, but most well-known is the 401k. The 401k has a contribution limit of $18,000 for 2017 (an ad­ditional $6,000 if you are over 50). If you have access to a company plan, you should ask:

  • Do they have pre-defined options (usually mutual funds) or a self-directed option where you can use stocks, bonds, ETFs, etc.?
  • Do they have a match? They may make a matching contribution. This is a big one! If you are properly vested, it is like getting an immediate return on your investment.

You also may have assumed that your investment choices were limited to a pre-defined set of securities and your own ability and inclination to wade through the pros and cons of various options. Actually, some larger companies’ retirement plans allow outside asset managers to “link on” to the participant’s plan. This lets you retain funds in the company plan and delegate the management of all or a portion of the balance to an outside professional money manager. You get all the benefits of working with a financial professional without leaving your company plan. Schwab Personal Choice Retirement Account (PCRA) and Fidelity BrokerageLink are the two leading platforms that support this, but there are others. Check with your benefits manager to see if these options are available in your plan, and of course what those options may cost.

While many investors start with their company retirement plan, saving more than the IRS-defined contribution maximums is generally not perceived as a bad idea. For those able to turbo-charge their retirement savings, multiple options exist with no contribution limits. Some of these options include DIY investing with a discount broker, utilizing a full-service broker, and hiring a Registered Investment Advisor. It is important to note that such options do not enjoy the tax-deferred growth of most retirement plans. Good results can translate to taxable income – it’s always best to confer with your tax advisor.

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DIY Investing with a Discount Broker

Some individuals research investments on their own or use outside resources such as investment newsletters to guide investment decisions. To execute trades, they go through a discount broker who acts as trading platform. Self-investor portfolios tend to be varied, but often have a mix between stocks and mutual funds. This may be a good fit if you are a seasoned investor, have plenty of time to dedicate to research and analysis, and can resist emotional reactions. The costs to conduct transactions are generally very low (usually under $10/stock trade) and many of the discount brokers offer some basic research and screening tools. Most discount brokers offer access to popular mutual funds and ETFs as well, for those not wanting to sift through individual stocks and bonds.

One metric by which you can measure your investment skill is to compare your performance against a commonly accepted benchmark. Mutual funds and ETFs have a stated benchmark; whereas an investor with a diversified portfolio will need to examine his investment objectives, timeline, and asset mix in order to select an appropriate index, or indices. For instance, the S&P 500 is a broad market sample based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ and is a common measure of domestic equity performance. The Bloomberg Barclays US Aggregate Bond Index is representative of the entire universe of taxable fixed-income investment and includes issues of the U.S. government, agency, investment-grade corporate (Baa/BBB or better), and mortgage-backed securities (MBS) bonds.

A 2015 Dalbar study indicated  that most self-investors underperformed commonly-used indices by several percentage points. This is true for both stocks and bonds. If you are consistently outperforming versus your selected benchmarks, then you are to be congratulated. You are in the minority. If not, you may want to reconsider your investment strategy.

Self-investor returns on equities (stocks) vs. S&P 500 Index*

Investment term Self-investor Returns S&P 500 Difference
30 year 3.7% 10.4% -6.7%
20 year 4.7% 8.2% -3.5%
10 Year 4.2% 7.3% -3.1%
5 Year 6.9% 12.6% -5.7%
3 Year 8.9% 15.1% -6.3%
1 Year -2.3% 1.4% -3.7%

Source: “Quantitative Analysis of Investor Behavior, 2016,” DALBAR, Inc. www.dalbar.com

Self-investor returns on bonds vs. Bloomberg Barclays U.S. Aggregate Bond Index*

Investment term Self-investor Returns Barclays Aggregate Difference
30 year 0.6% 6.7% -6.1%
20 year 0.5% 5.3% -4.8%
10 Year 0.4% 4.5% -4.2%
5 Year 0.1% 3.3% -3.2%
3 Year -1.8% 1.4% -3.2%
1 Year -3.1% 0.6% -3.7%

Source: “Quantitative Analysis of Investor Behavior, 2016,” DALBAR, Inc. www.dalbar.com

* Average equity investor, average bond investor and average asset allocation investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions and exchanges for each period.

Hitching Your Wagon to a Full Service Broker

Many full-service brokers are affiliated with a large financial institutions or brokerages. The full-service broker can often provide advice, as well as access to many products (mutual funds, annuities, insurance, managed accounts) and in some cases, services such as financial planning. In the past, clients typically chose a local financial advisor or broker. But today, with technology such as Facetime, Skype and others, the distance  barriers no longer exist. Brokers are often in a different city or state than their clients.  Many prospective investors have assumed that a financial  advisor had a fiduciary responsibility – that is, an obligation to act in the best interest of the client. But some financial advisors were actually incented to sell certain products or services that may meet a suitability standard, but not the more stringent fiduciary standard.

Moving to a Registered Investment Advisor

The category of Registered Investment Advisors (RIA) encompasses a broad range of choices from generalists who handle virtually every aspect of a client’s wealth, to specialists who manage a certain category of stock or bond. The common thread among all Registered Investment Advisors is that they are held to a fiduciary standard.  Most RIAs are fee-based, meaning their compensation is based on a percentage of assets the client has under management. Fee-based compensation is sometimes favored by clients, as it aligns the advisor’s interests with the client’s interests. RIAs may have higher investment minimums than the discount broker or full-service broker.

Charting Your Own Course

Some investors start with a company plan or discount broker, move to a full-service broker as they accumulate more funds, and then move to an RIA when they have reached the threshold that meets the minimums. Others prefer to self-manage using a discount broker, gaining experience along the way (perhaps using an investment newsletter such as The Prudent Speculator to get their ideas and research).  And certainly there are those that enjoy a relationship with a local financial advisor that they can bump into at the supermarket.  There is no right or wrong answer for your retirement savings options. Only you can determine what is most important to you.

make-the-golden-years-golden-saving-for-retirement-part-1_iconMake the Golden Years Golden

Have you been saving for 20+ years? Now is the perfect time to make sure you’re well positioned for the home stretch into your golden years.

Check-up on Your Future Today

The information provided herein is educational in nature, is not individualized, and is not intended to serve as the primary basis for your retirement, investment, or tax-planning decisions.

While AFAM has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein.

Nothing presented herein is, or is intended to constitute, investment advice, nor sales material, and no investment decision should be made based on any information provided herein.

098-AFAM-3/17/2017

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