Should you invest in an employer 401K/403B plan at work if you use a financial Advisor outside of work? I see this question all the time from people I have worked with over the years, friends and family members.
The simple answer is ABSOLUTELY! And here is why. Many employers have gotten away from those good old pensions people use to get from money put into your pension fund by your employer. They are now moving to 401K/403B plans. Many think this is a bad thing. But really it is to your benefit due to more flexibility in how you choose to invest your money. Pensions were usually setup in low paying and safe Annuities. Thus you the employee have no say so as to how the funds in your pension were invested and often getting extremely low interest rates. With many employers will match part of your base salary percentage rate and make a contribution to your 401K/403B up to a certain percentage. This is usually between 1 to 5 percent of your base salary in matching funds. Meaning, if your employer pays 3% as a match for your base salary in the form of an annual contribution to your 401K/403B this is FREE money contributed to your retirement. But here is the catch. If your employer says we will contribute up to 3% in matching funds of your base salary and you only contribute 1% to your 401K/403B with that employer, your employer will only match your 1%. So ALWAYS invest in an employers 401K or 403B plan of the match your employer will give you, plus any extra that you can afford in your budget.
The next reason to always invest in an employer 401K/403B is due to the tax benefit. All money you put into your 401K/403B through your employer is deducted before taxes are taken out of your pay check. Thus adjusting the taxable income of your paycheck in your favor, thus resulting to less taxes you have to pay to the IRS come the end of the year.
Next reason is because you can take the 401K/403B information to your independent Financial Advisor, review the choices and options you have and have him help you with choosing good investments/mutual funds to invest your money in and in what ratio's with your employer 401K/403B plan. Any good Financial Advisor will do this for you and at no cost, because they know down the road much of this money in the future is going to be entrusted into their hands. Never ask those 401k/403B employee representatives for advise as 99% of the time they are not truly Financial Advisors. They are merely salesmen there to sign you up for the employee plan. Any advise these guys extend to you is purely a guess and usually hogwash.
Even if your employer does not making a matching contribution you should still make contributions yourself to your 401K/403B! Again, due to the tax benefits. It is much better to take the tax benefits of your contributions than getting your paycheck, cashing it and writing a check to your independent Financial Advisor because then the money has been taxed and therefore you lose the tax benefits of putting in your employer 401K/403B plan. But, you say I want my money with my independent Financial Advisor instead of my employers plan. Good for you, wise choice. But you have to be savvy in doing this. Allow your employer 401K/403B plan with your employer to grow for a while and get your matching funds if any for that year. Once it has grown to around $20,000 dollars or more, go to your independent Financial Advisor and tell him to roll like half to three quarters of that money over into a Roth or 401K plan with him. You avoid any taxes, the transfer is usually free with most Financial Advisors and the company they represent (they want your money) and you now have benefit of a "real" Financial Advisors who will help you to control and monitor your investment choices as you work together to invest wisely for your future. This will offer you lots more flexibility as to how you invest your money. For example, your employer will contract with a family of funds. Lets say they use Fidelity as their contracted family of funds to choice from. Problem is you can only chose from the Fidelity family of funds and only from the funds they give you a choice of, not their entire family of mutual funds. Once your money gets rolled over to your independent Financial Advisor into a Roth or 401K plan, you have more choices. You get the choices of more Fidelity funds, or you can place your money into another family of funds. I do not like having more than a couple family of funds in my portfolio. As explained in other blog postings there are many great families of funds out there like Fidelity, Franklin, T. Rowe Price, Principle and others that your Financial Advisor can assist you with. Once your money is rolled over to your Financial Advisor your can all invest in individual stocks if you want to give that a try at some point in the future. For the new and average investor I do not recommend individual stocks. They are time consuming and require a lot of monitoring and pampering.
So think about things I have shared here and please, ALWAYS use your employers 401K/403B plan if they contribute matching funds or not. Take advantage of the tax benefits and then roll your money over to your Financial Advisor as your money grows in your 401K/403B plan. Hope this information is found of benefit to you today and I think it is a very important subject that needed to be addressed.
Gus S.
Disclaimer:
Make sure to review any information found on this blog site with your personal financial advisor before making any decisions. I am providing general information and not financial advise. I am not a licensed stockbroker or financial advisor.
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