Many people work with an advisor to, among other things, provide professional investment management. But the majority of their wealth is often tied up in their employer’s retirement plan. Now there’s a way to get active professional on those accounts, too.
Speaker 1 (00:07):
Welcome back to 30 Minute Money, the podcast that delivers action-oriented smart money ideas and bite-size pieces. I'm Scott Fitzgerald and our lovely Bushnell's Basin studio, joined by Steve Wershing of Focused Wealth Advisors. Hey,
Speaker 2 (00:20):
Fitz, how you doing?
Speaker 1 (00:21):
I'm doing well. Excellent. I'm enjoying, I'm enjoying our, our many fiscal conf fiduciary conversations. ,
Speaker 2 (00:29):
Don't say fiduciary. This is a family show. This guy, you can't go say words like fiduciary on the . Think of the children. .
Speaker 1 (00:37):
All right, so we're gonna talk about, uh, company retirement plans. Mm-hmm. and self-directed brokerage accounts. We are, which just rolls right off the tongue. Exactly.
Speaker 2 (00:48):
. Yeah. Right. Um, you know, we, we've, we talk a lot on this show about people, you know, not having a good balance between the three tax buckets, the tax deferred, the tax free, and the taxable accounts that most of the people who come in, you know, as they lead up to retirement, to see me have the problem of having 85% of their net worth tied up in tax-deferred accounts. And in a lot of those cases, they have a significant amount of their net worth tied up in their company retirement plan. Not just the tax deferred bucket, but a specific account within the tax deferred bucket. That could be their 401k or their 4 0 3 [inaudible] or something like that. And there are some downsides to that. There are some there, there, uh, many four [inaudible] and 4 0 3 [inaudible] offer lots of different investment options, but there's, but the menu is limited. It's, you can't just invest in a lot of the stuff that's out there, but more importantly, it can make it more difficult to get professional help and guidance as you, as leading up to retirement.
Speaker 1 (01:45):
Why is that so why does it make it harder to get help?
Speaker 2 (01:49):
Yeah, it, it's, it makes it harder to get help because most investment advisors get paid by charging, um, a fee based on how much of your investment portfolio they manage. And if you've got stuff tied up in your company retirement plan, there may not be that much for them. You know, there, there may not beno another account that's big enough for them to manage, or, you know, like people like me, you know, you can have a choice. You can either pay me a fee to do the planning or you can have me manage part of the portfolio. But in a lot of, ca in a lot of cases, people would just rather not have to, you know, write a big check for a plan. And so not having money available for an investment advisor to help you with really puts, puts you outta the market with a lot of the choices of, of who you might hire to, to get help on it. But there is a way that you can still get the help of, uh, a financial advisor and you can get professional management on those choices. Uh, because now more and more plans are offering what we would call a brokerage window, but technically, which is, um, technically what's referred to as a self-directed brokerage account as an option within the 401k or 4 0 3 [inaudible].
Speaker 1 (03:08):
Hmm. Well, that's interesting. So you can have a brokerage account inside the plan.
Speaker 2 (03:12):
Exactly. Exactly. And if you have that, then you can probably leverage that to get professional help. And, you know, a great example of that is right here in town, the University of Rochester, um, their retirement plan is through T I A A T I A is great. It's a, it's a great, it's a great company. They've got a long history and, and, and universities and schools across the country. Um, and there are a couple downsides to it. Um, one of them being that they, they do have good options to invest in within T I a, but they are limited. They, they don't span the entire range of investment opportunities. But the other thing is that, um, you know, if you've got all of your wealth tied up in T I A A, then, you know, you may not be able to, to get professional help.
You may not be able to get a financial planner or an investment advisor to help you. But within the University of Rochester's plan, specifically, because I've got a bunch of clients at the U of R, um, there is the brokerage window. So you can open up a brokerage window, a self-directed brokerage account within your T I A A account. And by, and if you do that, then there's a way that I can go in and manage that stuff on an active basis for you, and you don't have to have a big account on the outside to be able to take advantage of that help.
Speaker 1 (04:29):
This is exactly what I've been looking for, Steve. That's,
Speaker 2 (04:32):
That's why I wanted to talk with you about it. You
Speaker 1 (04:34):
Brought this in, you, you, this guy , this guy. Um, so, so how does that help someone like me or my wife or whatever get advice?
Speaker 2 (04:43):
Yeah, so, um, the U of R like, like many, maybe even most, uh, schools that, that have t i a as their retirement plan carrier, they don't allow for someone on the outside to come in and charge a fee to manage a portfolio. However, we have relationships with many, with many outside money managers. And what they've done is they've taken their money management programs and they've, uh, created a version of that that is a mutual fund. And those mutual funds have gotten onto the platforms that, of the self-directed brokerage account. So you could open up a self-directed brokerage account, and then we could choose a collection of the mutual funds that were put together by these outside money managers. Um, and what they've done is they've, um, you know, they've created these, and what they do is, instead of me charging a fee to manage that, I work with that money manager and there's a, an expense ratio within the mutual fund, and they take a portion of that expense and they pay me or pay some other investment advisor a portion of that.
So it's a way of us being able to, uh, help you do real time active money management in that portfolio and, and figure out a way to get paid for it. And at least in my case, what it does is it up all the other planning opportunities for you. So, you know, we can do a full financial plan, we can do that kind of stuff because now there's an avenue for us to get paid without you having to write a great big check to us. Now, there are some potential disadvantages to that too, right? This isn't like perfect. Um, one of the things is that if you open up a self-directed brokerage account, you lose some of the protections that the, that the company that sponsors the plan is required by law to provide you. So under retirement plan law, um, the sponsor of a plan is required to look at those investments every year and do some analysis of them and make sure that there's still a good choice, that there's still good investments to have in the plan.
And if you go into a self-directed brokerage account, you're on your own, right? So if you, you can do that on your own and, and manage your own portfolio that way, and that's fine, but you would lose those protections that are otherwise, um, required by the Department of Labor to, uh, to be provided to you by the plan. Um, and by, uh, you know, the, like, uh, the retirement plan carriers either use inexpensive mutual funds shares, or ha they have negotiated down the costs, the internal costs of those investment options. And if you go outside of that to a brokerage platform, then there's a pretty good chance that the mutual funds that you might choose are gonna be a higher expense ratio than the ones that you could get within the plan. But, you know, those are, you know, those are, those are disadvantages, but you need to weigh 'em back and forth.
If you can get certain kinds of funds that you can't get within the plan, it may be more expensive. It still may be an opportunity. It's one of those things that you really have to look into and, and do some analysis on. But by utilizing a self-directed brokerage account within the plan, it enables you to leverage the benefits of the plan and get the benefits of having a, uh, you know, having an account essentially outside of the plan where you, you know, you can find investments that are not, that don't exist in the plan, and broaden your portfolio a little bit or potentially take advantage of some professional management at the same time without pulling money out of the plan. Is this a relatively new thing
Speaker 3 (08:03):
Speaker 2 (08:04):
Relatively, they've been around for a while now, but they've really only started getting popular in the last few years? So this is something that a lot of people may, um, may have available to them, but they may not know about. So first, they are fairly new, but also, you know, there's, there's no incentive. In fact, there's a disincentive for retirement plan companies to talk about these things because that means that it's money that they won't be able to manage anymore. That they, they're, they, you know, they make less money. If you move stuff into a self-directed brokerage account, right into something that they're not gonna get paid on.
Speaker 4 (08:38):
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Speaker 1 (10:04):
What's your 30 minute action item?
Speaker 2 (10:06):
30 minute action item is if you're looking for professional help or want broader investment opportunities, and most of your investments are tied up in your company plan, call the HR department to look into the plan to see if you qualify for a self-directed brokerage account.
Speaker 1 (10:21):
Once again, another episode of 30 Minute Money, Steve laying down the facts. And, uh, you can find it at 30minute.money. I'm at rocvox.com and of course, Steve can be found at focusedwealthadvisors.com. We'll be back next time on 30 Minute Money.