MONEY 401(k)s

The Secret To Building A Bigger 401(k)

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There's growing evidence that financial advice makes a big difference in your ability to achieve a comfortable retirement.

Some people need a personal trainer to get motivated to exercise regularly. There’s growing evidence that a financial coach can help whip your retirement savings into better shape too.

People in 401(k) plans who work with financial advisors save more and have clearer financial goals than people who don’t use professional advice, according to a study out today by Natixis Global Asset Management. Workers with advisors contribute 9.5% of their annual salary to their 401(k) vs. 7.8% by those who aren’t advised, according to Natixis. That puts workers with advisors on target for the 10% to 15% of your annual income you need to put away (including company match) if you want to retire comfortably.

Natixis also found that three-quarters of 401(k) plan participants with advisors say they know what their 401(k) balance should be by the time they retire vs. half of workers without advisors who say the same.

The Natixis study follows a Charles Schwab survey out last week that found that workers who used third-party professional advisors and had one-on-one counseling tended to increase their savings rate, were better diversified and stayed the course in their investing decisions despite market ups and downs.

Similar research was released in May by Financial Engines—that study found that people who got professional investment help through managed accounts, target-date funds or online tools earned higher median annual returns than those who go it alone. On average employees getting advice had median annual returns that were 3.32 percentage points higher, net of fees, than workers managing their own retirement accounts.

Granted, most of these studies come from organizations that make money by providing advice—either directly to investors or as a resource provided by 401(k) plan providers. Still, Vanguard, who provides services to both advisers and do-it-yourself investors, has published research showing that financial guidance can add value. In a 2013 research paper, Advisor’s Alpha, Vanguard said that “left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long-term objectives.” According to Vanguard, advisers can help add value if they “act as wealth managers and behavioral coaches, providing discipline and experience to investors who need it.”

In other words, the value of working with an advisor, like a personal trainer, may simply be that when someone is working one-on-one with you to reach a goal you are more likely to be engaged.

Whether you want to work with a financial advisor is a personal decision. If you’re like many people who feel overwhelmed by investment choices, or don’t have a lot of time to spend on investment decisions, getting professional financial advice can help you stay on course towards your retirement goals. You can get that advice through your 401(k) plan or via a periodic check up with a fee-only financial planner or simply by putting your retirement funds into a target date fund.

Still, before you hire a pro, make sure you understand the fees. A recent study by the GAO found that 401(k) managed accounts, which let you turn over portfolio decisions to a pro, may be costly—management fees ranged from .08% to as high as 1%, on top of investing expenses. Ideally, you should pay 0.3% or less. High fees could wipe out the advantage of professional guidance.

Other research has found that you may get similar benefits—generally at a much lower cost—by opting for a target-date fund. If you go outside your 401(k) plan, it’s generally better to use a fee-only planner, who gets paid only for the advice provided, not commissions earned by selling financial products. You can find fee-only financial planners through the National Association of Personal Financial Advisors; and for fee-only planners who charge by the hour, you can try Garrett Planning Network.

Still, if you enjoy investing, and you are willing to spend the time needed to stay on top of your finances, a do-it-yourself approach is fine. Using online calculators can give you a clearer picture of your goals, and simply knowing what your target should be can be motivating. The Employee Benefit Research Institute (EBRI) consistently finds that people who calculated a savings goal were more than twice as likely to feel very confident they’ll be able to accumulate the money they need to retire and are more realistic about how much they need to save. All of which will help you reach your retirement goals.

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