Should You Manage Your 401(k) Yourself?

By JLP | May 9, 2008

This question comes to us from a guy I have known my entire life:

I read your article the other day be-considered-market-timing/>Should Portfolio Rebalancing Be Considered Market Timing? and it got me thinking about my 401k balance. Im turning 40 next month and am looking at my 401k balance, thinking should someone with my level of investment knowledge be managing this account?

Over the years, its grown to a significant amount without any research on my part, I just deposit money spread it over several funds and watch it grow. Rebalanced the 401k last year using a financial engine software supplied by my company, but as it turns out my market timing was bad. Overall, I think the diversification across 12 mutual funds is good, but still wonder if I could maximize gains or choose better times to rebalance the portfolio.

Im guessing that most people manage their 401ks themselves, but should they? Especially once the 401k reaches a higher balance as theres so much more growth potential. Is there any added value to authorizing a professional to manage your 401k?

Thanks,

Wow! I cant believe one of my friends is turning 40.

First off, just because you made changes to your plan and the market went down, does not mean you made a bad choice. Remember, were looking long-term here so we really shouldnt care what happens right now. No, its not fun to watch a 401(k) balance drop but we have to look at the big picture.

If you have a relationship with an advisor, they might be willing to take a look at your plan. However, if they are commissioned-based, I wouldnt expect them to spend a lot of time analyzing your plan and making suggestions since they dont get paid for that kind of work.

There are lots of fee-only financial planners out there that will offer advice on 401(k)s. Youll have to pay an hourly fee but it might be worth it if you think you need a second opinion. I will tell you that lots of planners are just going to run your fund choices through Morningstar or something similar to Financial Engines, so youll most likely get the same results as you already got when you ran the numbers yourself. A good planner will also help you assess your risk tolerance and educate you on the best asset allocation for you based on your risk tolerance, age, and time horizon. So, there could be some value added there. Just be prepared to spend $150 $300 for the advice.

Im not sure it is necessary for you turn over management of your 401(k) to a professional. Asset allocation is pretty cut and dry and can be easily grasped by most people by reading any number of books. I realize that reading a book on asset allocation is probably not at the top of most peoples list of desirable activities but I honestly believe that EVERYONE should have a basic grasp of investing and asset allocation. Fortunately, there are books out there that are very easy to understand and are actually interesting. One of the best books I know of is a short little book called The Coffeehouse Investor (Affiliate Link ), which I read in a couple of hours. It will give everyone a basic understanding of asset allocation and investing. EVERYONE should read The Coffehouse Investor.

If you want something beyond that, I would suggest taking a look at The Intelligent Asset Allocator (Affiliate Link ) by William Bernstein. Its a little on the dry side but is still a very good book and will definitely give you a better understanding of asset allocation.

So, those are my thoughts on 401(k) management. What do you guys think? Should people hire a professional to manage their 401(k) account? Why or why not?

19 Responses to Should You Manage Your 401(k) Yourself?

Probably not worth it for the same reasons you mentioned. The 401k probably has a fairly limited number of choices: maybe an index fund, a few domestic large caps, a few small to mid caps, a few bond funds, and maybe an international fund or two.

Paying someone to create a portfolio from these when youve probably already set up a fairly decent allocation is probably overkill. Like you suggested, do a little reading on the basics of asset allocation, and they can probably tweak their 401k holdings as necessary.

KC Says:

Im just not sold on professional money managers. I think most people, if they bother to educate themselves on the subject and keep up to date, can do just as good a job particularily in the area of asset allocation. My experience with professional planners are they take a lot of your money up-front and then put you in mediocre funds. Then they move up in the company and you are passed along to someone else. I dont think the gain from using them is very great if you have an interest and a bit of time (maybe 3-5 hours a week) to devote to your money.

tom Says:

I would agree that its not worth it. As JLP said, there are many asset allocation books out there, which essentially offer up the same allocations by age group. Most corporate 401(k)s offer a limited number of funds, so building an allocation based on one of the book models will be fairly easy.

@KC professional asset managers normally dont take your money up front. Most are fee based, and take a very small portion of your assets on a annual or quarterly basis (Im talking around .25% annually), and its a sliding scale for most .25% for up to 10 mil .10% for over 10. Most managers go over, in great detail, a plan specific for you. They dont just put you money into mediocre funds that you are unaware of.

Travis Says:

We actually manage quite a few 401ks. For .55% per year, we have comprehensive annual reviews, send out quarterly performance/risk analysis, and monitor the funds on an ongoing basis to make sure they are still on track.

Before that, we run reports comparing how they are invested versus our proposal. The majority of the time we can construct more divisified portfolios with less risk and higher returns than what they selected on their own.

It really just depends on the investor. You need to ask yourself if you are knowledgeable enough to come within .55% of a financial professionals risk-adjusted returns every year or if its even worth your time. If the answer is no, then just hire an advisor who knows what he/shes doing. Its really a minor expense in my opinion if you can find a great advisor to do it for you. One bad year on your own could pay for decades of professional management.

The biggest problems I see in people who try to manage their 401ks themselves are:

1) Lack of proper diversification especially a lack of fixed income

2) Improper risk levels they pick the fund with the highest historical return (and also the highest risk then the market goes down 15% and that fund falls 25%)

3) They set it up their 401k and then forget to monitor it on an ongoing basis

4) They dont know whether they are doing well or not versus an appropriate risk-adjusted benchmark causes anxiety

Hope that helps!

What I do is to regard my 401K as part of my portfolio universe, and not one by itself. So, I find the most non-awful fund in it, put 100% of my allocation in it, and call it so allocated. In my case, my 401K has a S&P 500 index fund in it, so all my moneys there. IRAs, where I have lots more investment options, round out the field.

If I had all my money in my 401K, this would be a more problematic strategy, but my 401K represents only about 25% of my retirement savings.

Baba Ghanoush Says:

I would add that rebalancing back to your asset allocation is primarily about maintaining your your risk profile, and only secondarily about garnering a short-term rebalancing benefit. Over time, because the market rises on average, you will most often make a small premium from rebalancing, but this will not always be the case.

I think that one of the most valuable things an advisor can do is to get you to stay the course. If you can manage your own greed and fear then by all means dont pay the advisor premium. It doesnt take that much effort to educate yourself about investing, and even if you have an advisor, you still need to know youre getting the right advice.

Definitely not worth it to have the advisor, in my opinion.

For my 401k plan, they just offer three funds where they invest in all the other funds. My company offers John Hancock so they allowed me to select from Conservative Fund, Aggressive Fund, and Ultra Aggressive Fund. It makes it easy for me since I do not really have to do anything. It might not be the best choice but is also good if you dont have enough time to do any research yourself.

daretobedull.com/download/2nd%20grader%20portfolio.pdf

and then do it themselves. 12 funds is overkill.

Francis

I have been debating this recently myself. I feel that my portfolio has under performed the last few years and I am seriously thinking about hiring a professional.

Banker

Although I trade for a living, I am finding with my own money that I have been under performing the last few years. Therefore I have been seriously considering hiring a professional.

My $.02. As Poster Allen noted, many 401Ks offer but three choices, or perhaps four (aggressive, moderate, conservative, all cash) with the 401K managed by a professional investment company. No need for a fee-based advisor there. Your 401K might be invested with, say, Vanguard, where your options are a bit broader (say, you can pick from 20 30 Vanguard funds), but Vanguard is happy to give you advice for free on how to allocate. Ive never experienced a 401K plan where ones employer simply says what do we do with this?

A bigger issue is whether you need advice when you rollover the 401K, such as when you switch jobs, or when you retire. In that event, I would say that a one-time fee of $300 would be money well-spent, since your options really are unlimited and you may be overwhelmed by the process. Another time you might want a complete, professional portfolio analysis is when you think you are about ten years from retirement. If you cant answer the basic questions how much will I need to retire and when can I retire, you need input. Caveat: dont expect to get unbiased advice from no fee annuity sales reps in that regard. One thing youll discover is that you can mimic an annuity yourself, using FDIC or NCUA-insured CDs, properly laddered, of course. My ten-year ladder yields 5.75%, all insured.

Yours,

Bozo

muddlehead Says:

yes.

Lectrice Says:

All these comments are very helpful, and thanks especially for yours, Foobarista. At my annual review with my advisor last week I asked him about allocating my holdings across all my accounts, ie, whether my tax deferred accounts (401K, IRA) should hold different kinds of funds than my taxable accounts (except for my 401K they all have sort of the same mix). Without asking about what was going on in my 401K, he shrugged and said everything seemed to be about right. Because of that lack of interest about my entire holdings, his sky-high fees, and more time on my hands, Im planning on taking back management of my own portfolio (Im very tempted by the 3 total stock index funds model). Meanwhile Im trying to figure out how much reclaiming my moneys going to cost me

No. The reasons are pretty well covered.

tinyurl.com/34fohw

I rebalance my 401(k) at least monthly and closer to weekly, much as Teresa suggests for her performance portfolio (and I have been doing that since I stumbled on her recommendation). As Foobarista says, I take a holistic view of all of my accounts 401(k), self-directed Roth, cash accounts, checking, taxable investment account, everything. Its all balanced with respect to every other component; nothing is done in isolation. However, weekly/monthly rebalancing has been very kind to me. I should keep better stats to quantitatively evaluate the performance but Ive been too lazy to do so.

Anyway, something to think about.

I must confess that I never thought of rebalancing my 401(k) until I started doing some self-directed learning on investing. What I realized is that I can and should take a more active role in managing my own portfolio and that it really is not that difficult; if you are willing to do your homework. So, I started a new journey into the stock market! It is very interesting and I am learning a lot. I am also becoming more confident in the decisions I make concerning investments. So much more to learn though! These comments are very helpful.

Seamus Says:

I think it all depends on the individuals level/interest in their 401(k) account. I work in my companies payroll department and when 401(k) new enrollment forms come across my desk and I see a 22 year old allocating 100% to bonds it makes me cringe. If you have a moderate interest in your retirement well being I think a person should be able to handle it on their own. If you know nothing on the subject, i.e 100% bonds, then the fee would be well worth it.

My thoughts are that by age 40, the cost of paying an adviser might be worth it, because there might be enough money in the account for a fee-based adviser to be really cheap compared to the upside of better returns. For 401(k) beginners, though, I would recommend a more do-it-yourself approach. I wrote an article on how to get started: