Should I Hire a Financial Advisor for my 401(k)?

Your 401(k) may be one of the largest assets you own. You contribute every paycheck. Your employer may match part of it. You’ve dutifully increased your contribution over the years. And after a decade or two of working, your retirement savings may have grown into hundreds of thousands of dollars—or considerably more.

But here’s the interesting part: your very large account may also be the investment account getting the least amount of attention.

Your 401(k) Is Too Important to Be on Autopilot

Maybe you chose your investments when you started your job ten years ago and haven't looked at them since. Maybe you picked a target-date fund because the year seemed about right. Or maybe you carefully selected your investments at the time, but your career, income, family circumstances and retirement timeline have changed considerably since then.

Meanwhile, you might be utilizing a robo-advisor to manage your IRA or brokerage account. And this happens while your much larger 401(k) is quietly chugging along on its own. This can create a pretty significant disconnect.

Your 401(k) doesn't necessarily have to be something you manage by yourself simply because it sits inside your employer's retirement plan. Depending on your plan and the services available to you, it may be possible to have an advisor help manage those investments as part of your overall financial life. For some people, this intentional focus can be incredibly valuable.

Your 401(k) Shouldn't Live on an Island

Good retirement planning isn't about looking at each account separately. It's about understanding how all the pieces work together. Your 401(k), IRAs, Roth accounts, brokerage accounts, Social Security, cash reserves and other assets should ultimately support the same financial goals.

Yet it's surprisingly common for these accounts to be managed as completely separate buckets. You may have one investment allocation in your 401(k), another in an old IRA and something entirely different in your brokerage account. Individually, each account might look perfectly reasonable. Put them together, though, and you could discover you're taking significantly more—or less—risk than you intended. You might own essentially the same investments in three different places, or you may be missing an important asset class altogether.

That's why I prefer to think of someone's investments as one portfolio with multiple accounts inside it.

Imagine you have $500,000 in your current 401(k), $250,000 in an IRA from a previous employer and $150,000 in a taxable brokerage account. Technically, you have three accounts. But economically, you have $900,000 invested toward your financial future. (And don't forget to think about any equity you might have built-up in your home, if you're a homeowner.) Let's say you have $200,000 of equity in your home.

That distinction matters. Instead of asking, “How should I invest my 401(k)?” we can ask a much better question: “How should my $1.1 million be invested to support the life I'm trying to build?” Then we can determine which investments make the most sense inside each account.

Perhaps your 401(k) has an excellent, inexpensive bond fund. Your IRA might offer more flexibility for a particular type of investment. Your taxable brokerage account may need to be managed with capital gains and tax efficiency in mind. Suddenly, we're not just picking funds. We're building an investment strategy.

There's More to It Than Choosing the “Best” Funds

Open your 401(k) investment menu and you may see 15, 25 or even 40 choices: large cap, small cap, international, bonds, target-date funds, stable value and perhaps company stock. Faced with all those options, it's natural to ask which ones are best.

That's actually the wrong question. The better question is: Which combination is best for you?

Your age, risk tolerance, income, tax situation, other investments, retirement timeline and future income needs should all influence your investment decisions. A fund can be perfectly good and still be completely wrong for your portfolio.

And the fund with the best performance last year isn't necessarily the fund you should buy this year. In fact, constantly chasing whatever investment recently performed best can lead to exactly the kind of buy-high, sell-low behavior we're trying to avoid.

This is one area where professional help can be useful. Someone else can evaluate the investments available inside your plan based on how they fit into your overall strategy—not simply which fund has the prettiest performance number next to it.

Your 401(k) Should Change as Your Life Changes

Think about the woman you were ten years ago. There's a decent chance she had a different salary, a different 401(k) balance and a very different idea of what retirement looked like. Maybe retirement wasn't even on her radar.

Now perhaps you're 52 or 58, and “someday” has suddenly turned into an actual date on the calendar. That changes things.

As you get closer to retirement, your investment portfolio may need to start doing a different job. You're no longer simply accumulating money for some distant point in the future. You're preparing that money to eventually provide income. Your capacity for investment risk may change. Your tax strategy may change. Your cash needs may change. Your retirement accounts need to evolve along with you.

This doesn't mean dramatically changing investments every time the stock market has a bad week. Quite the opposite. It means having a thoughtful strategy that changes because your circumstances changed—not because Fox Business had a particularly dramatic Tuesday.

Rebalancing Sounds Simple—Until Life Gets Busy

Let's say you decide your appropriate investment mix is 70% stocks and 30% bonds. Then stocks have a fantastic year. Congratulations! But now perhaps your portfolio is 78% stocks and 22% bonds. Without realizing it, you're taking more investment risk than you originally intended.

Rebalancing brings the portfolio back toward its target allocation. The concept isn't complicated. Actually doing it consistently is another matter.

Careers get busy. Parents need help. Kids go to college. Houses require repairs. Vacations get planned. Dogs eat things they absolutely should not eat. And reviewing your 401(k) somehow keeps getting pushed to next weekend.

Having someone responsible for reviewing your investment allocation can create a level of discipline and accountability that's difficult to replicate when you're doing everything yourself.

Where Your Retirement Contribution Goes Matters

Managing a 401(k) isn't only about deciding which funds to own. There's also the question of how much you're contributing and where those contributions should go.

Should you make traditional pre-tax contributions? Roth 401(k) contributions? A combination of both? Should you increase your savings rate after a raise? Are you contributing enough to receive your entire employer match? Should you max out the plan, or would some of those dollars be better directed elsewhere?

There isn't one answer that's right for everyone. Your current income, expected future tax rates, other savings, age and retirement plans all matter. For someone in her peak earning years, traditional contributions may offer valuable tax savings today. Someone else might benefit from building more Roth assets to create tax flexibility later.

These aren't just 401(k) decisions. They're tax and retirement planning decisions, and they're most useful when they're made as part of a comprehensive plan rather than in isolation.

Tax Diversification Can Matter in Retirement

Imagine reaching retirement with $2 million saved. That's wonderful. But there's an important difference between having $2 million entirely in pre-tax retirement accounts and having $2 million spread across traditional retirement accounts, Roth accounts and taxable investments. (You may have heard this spoken about as "asset allocation".)

Those different accounts give you different options for creating income. Withdrawals from traditional retirement accounts are generally taxable as ordinary income. Qualified Roth withdrawals can generally be tax-free. Taxable brokerage accounts have their own rules around dividends, interest and capital gains.

Having multiple “tax buckets” may give you more flexibility to decide where your retirement paycheck comes from each year. That can potentially affect your income taxes, Medicare premiums and other parts of your financial picture.

This is why a comprehensive financial plan should look beyond investment returns. The goal isn't simply to earn the highest possible return. It's to make your money work efficiently for your financial situation.

And What About That Old 401(k)?

If you've had a long career, there's a good chance you've accumulated more than one workplace retirement account. Perhaps one or two are still sitting at previous employers.

That isn't automatically a problem. Sometimes leaving money in an old employer plan makes perfect sense. Other times, consolidating accounts may make your financial life easier or provide different investment options. The important thing is to make the decision intentionally.

When evaluating an old 401(k), consider the plan's investment options, expenses, services, withdrawal rules and any other features that may be valuable to you. Compare those with the alternatives available before moving money.

An independent financial advisor can help you evaluate those choices rather than assuming every old 401(k) should automatically be rolled into an IRA. Sometimes the best answer is to leave it exactly where it is. That's still a financial decision—and sometimes a very good one.

There's Also a Human Side to Investing

There is another potential benefit to having someone help manage your 401(k), and it has nothing to do with selecting funds: creating a little distance between you and your emotions.

Investing gets considerably harder when markets are falling. When your account balance drops by $50,000, $100,000 or more, suddenly the very sensible investment strategy you loved six months ago can feel terrifying. That's when investors may be tempted to make big changes: sell stocks, move everything to cash and wait until “things settle down.”

The problem is that no one rings a bell when it's time to get back in.

Good financial professionals aren't there simply to choose investments. Part of their job is helping you stick with an appropriate strategy when financial headlines make that strategy feel uncomfortable. Sometimes the most valuable investment decision is the one you don't make.

Do You Really Need Someone to Manage Your 401(k)?

Some people genuinely enjoy researching investments, determining asset allocations, rebalancing portfolios and coordinating multiple accounts. If that's you, wonderful.

But plenty of very smart, successful women have approximately zero interest in spending Sunday afternoon comparing the international equity options inside their employer's retirement plan. That's okay, too.

Hiring a professional isn't an admission that you're incapable of doing it yourself. It's deciding where your time and attention are most valuable.

You probably could learn to do your own taxes, draft your own estate documents and diagnose whatever horrifying noise your car started making this morning. That doesn't necessarily mean you should. The same can be true of managing your investments.

And that's an important distinction. The value of working with a financial professional isn't that you couldn't possibly figure this out yourself. The value is having someone whose job is to pay attention to your investments, understand how they fit together and help you make thoughtful decisions as your life changes.

Because your financial goals probably aren't things like “achieve the optimal small-cap allocation.” They're more likely... to retire at 60, travel for three months every year, help your kids without jeopardizing your own retirement, buy the house by the lake or simply know you'll be okay if you're doing this on your own.

Those are the goals that matter. Your retirement savings are simply one of the tools you're using to get there.

Working with an advisor who can help manage your 401(k) alongside the rest of your investments can turn a collection of accounts into a coordinated strategy. More importantly, that strategy can help turn all those years of saving into something much more meaningful: choices.

Choices about when you work. Choices about how you spend your time. Choices about whom you help and what comes next.

Because ultimately, the goal isn't to become really good at managing a 401(k). It's to build a financial future that gives you the freedom to decide what you want the next chapter of your life to look like.