Client Login

Back To Blog

Do I need a financial advisor for my 401k?

July 22, 2021 | Cooke FG

Do I need a financial advisor for my 401k?

A 401(k) is a retirement plan that allows employees to set aside a portion of their pre-tax earnings (regular 401k). This “payroll deferral” money can be invested in a variety of investment funds within the 401k plan, and the earnings on the investments are not taxed until the employee withdraws their money (generally at or after retirement age). Employers may also match employee contributions to the plan up to a certain amount. For example, an employer may contribute 50 cents for every dollar an employee contributes up to the first 6% of the employee’s salary.  This would mean if the employee contributed 6%, then the employer would add 3%, for a total annual contribution of 9% of pay toward the employee’s retirement account.

401(k) accounts are for retirement savings and need to have risks managed appropriately.  These accounts generally need to be invested in broadly diversified investments to reduce the risk of a substantial loss (which might occur if you owned only one or two stocks in a concentrated portfolio).  Broad categories such as “large US stocks” or “fixed income” are offered through well diversified investment choices in a 401k plan.  For this reason, many 401(k) accounts are managed and run by large, well-known financial services advisory companies such as Fidelity Investments, the Vanguard Group, or other large mutual fund complexes.

The 401k accounts are usually monitored and controlled by an investment professional working with the employer’s 401k plan trustees.  Since the 401(k) accounts are the employee’s retirement plans, the plan trustees should choose investments that carry lower risks.  For this reason the account holders are usually limited to investments within a restricted list (10 – 20) of diversified asset classes. 401k plans usually provide the option of choosing between mutual funds with varying investment strategies including US equities, international equities, fixed income (bonds) and cash.

This is when we ask an important question:

“Should I use a financial advisor or choose my 401k plan investments by myself?”

You do not necessarily need a financial advisor for 401(k) if you know and understand which mutual funds to choose for your 401(k) and you have some investment experience.  In this case you may manage your own 401(k) through consultations with your 401k fund manager. This is one of the biggest 401(k) advantages and helps to make 401(k)s a (reasonably) hassle free passive investment plan.

But it is not a bad idea to hire a financial advisor to assist you when determining your 401k fund allocation (mutual fund mix).  Factors such as your age, risk tolerance, earning potential, and lifestyle goals should be considered thoroughly.  Working with a financial advisor may help maximize the long term/average returns on your 401(k) by reaching a “best” decision based upon all of these factors. Many investors who are inexperienced, very risk averse, or generally nervous about investing may make poor investment allocations, typically by being too conservative and “loss averse”.   If average expected returns on 401(k) are between 1% (cash/bonds) and 8% (diversified equities), then a financial advisor can help maximize the returns and minimize risks within the employee’s risk tolerances.  The financial advisor can also help the employee avoid making poor decisions during periods of market volatility (short term loss) by offering an experienced, educated bit of advice.

Self-Directed 401(k)

Traditional 401(k) accounts are managed using mutual funds and they provide a narrow list of diversified classes of assets for investment. Some people prefer to take investment matters into their own hands by opting for self-directed 401(k) or self-directed individual retirement accounts.

Self-directed 401(k)s are offered by many financial institutions.  They allow access to a broader class of assets such as individual stocks, ETFs, precious metals and REITs etc. Self-directed 401(k)s however are generally not passively invested.  They require actively creating your own portfolio and monitoring your portfolio.  This more active level of involvement is why most people using a self-directed account hire a certified financial planner or advisor to assist them.

Is it worth having a financial advisor?

A financial advisor can be a great resource to have in your corner. They can help you navigate the complex world of investing, and help you plan for your future. However, the financial advisor is not a necessity. If you are interested in investing, and commit enough energy to your plans, you can do it yourself. The basics of investing are not hard to understand.


  • Risk-reward relationship: You need to understand that the risk-reward relationship is directly proportional.  Generally, the higher the risks, the higher the rewards.  And, of course, the lower the risks, the lower the rewards. And there are always exceptions!
  • Risk appetite: You need to know/understand your own risk appetite. Are you risk averse or a risk seeker? Risk averse investors usually adopt a low-risk strategy whereas risk seeking investors go for a higher risk approach.
  • Time horizon: Investments should always be bound by time. You should know whether your investments are short term (0-3years) or for the long term (usually thought of as a full market cycle – about 5 – 7 years).  These different time horizons should have different investment strategies.

If you can understand these concepts and feel comfortable with your investment options, then you can formulate your own investment strategy.  But this is not the only service that financial advisors provide. Having a financial strategy is one thing, successfully executing it is another. In order to execute your strategy, you should also understand market cycles and have knowledge of all the investment options available to you.  Occasional rebalancing and tactical tilting of a portfolio may add additional value and increase your results.  All these steps can be used to create a diversified portfolio that suits your investment goals.

Retirement planning and financial planners.

While most 401(k) accounts are designed to be infrequently traded, what about retirement planning (more broadly than just your 401k)?

Retirement planning requires knowledge of many additional factors such as:

  • How much do you need to retire?
  • Ability to scale up the income sources
  • Creating multiple income streams
  • Personal financial management, including spending control and intelligent investment allocations.
  • Knowledge of various investment options
  • Wealth creation strategy
  • Assessment (and follow up assessments) at various stages of life

This is not easy.  Doing it on your own means any mistakes create risks for retirement nest egg shortfalls.  This is a primary reason why individuals are well-advised to seek the services of a financial advisor for more comprehensive retirement planning.

Your 401(k) account is just one expected income stream in your retirement life. Almost everyone will require multiple income streams and wealth creation strategies to live a comfortable (financially secure) life during retirement.  Achieving these goals is more likely done with the guidance of a qualified financial advisor.  Your financial advisor can help make sure you are saving enough money for retirement and that you're not taking on unnecessary risks. This will help you get the most out of your 401K, and other available income streams.

Another question many people ask is should I get a financial advisor in my 20s?  Or is this too early for retirement planning? The answer is yes, the earlier you start the better, and a financial advisor’s guidance can get you started on the right path. In your 20s, a certified financial planner with experience can help you craft the best retirement strategy that will help you live a life of comfort.

The Cost

The charges for financial advisors vary and can take different forms. The most experienced and highly reputable financial advisors costs are higher, but for a reason. But most financial advisors have reasonable rates.

The following chart can help you understand this better.


Basis of Fee Average Rate
Annual $2000 - $7500/annual retainer
Hourly $100 - $400/hour
Plan based fee $1000 - $3000/plan
Based on the value of portfolio 0.5% - 1%/based upon assets under management

Financial advisors are professionals who know and understand the markets.  Many of the best have designations like “certified financial planners” (CFP) for a reason.   They are trained and qualified to provide these services.  By hiring the financial advisor you will cut down the workload and due diligence that you must perform personally, and you gain access to industry knowledge, competence and expertise. This is where financial advisors help you attain your financial goals and plan for a retirement life of financial security and comfort.

 

 

 

 

To learn more about Cooke Financial Group's services, please visit our About page.

Please Share
Top