In a recent Last Week Tonight segment on retirement plans, John Oliver warns that we need to be careful about how you save for retirement. “Financial advisors” may not know any more than you about how to invest retirement dollars. In addition, their advice may be based on the size of the commission they will receive and not on your best interests. (You can find Just Care’s advice on whether to trust your retirement advisor here.)
Keep in mind that people can call themselves financial advisors or give themselves other fancy titles without having any special expertise. People with titles such as “financial advisor,” “financial analyst,” “investment consultant” may have little understanding of the financial markets. So, it’s important to find out a bit about their training; you might also ask for client references.
As important, find out if they are working as your fiduciary and acting in your best interest. As we explained in an earlier post, many of these financial advisors work on commission and have no fiduciary duty to you. You may not be able to trust them. They can put their own interests ahead of yours unless they are fiduciaries. If they are not your fiduciary, they may be recommending investments because they generate high commissions for them. These investments may not be smart ones for you. (This should change thanks to a new law that will go fully into effect in 2018.)
Also, if your advisor is recommending you invest in annuities, beware. Advisors can make very large fees from annuities. Again, find out more about the fee structure and your projected returns. Oliver explains that in addition to commissions, brokers selling annuities often get free cruises and luxury watches. They may be good for the broker, but they may not be in your interest.
Oliver calls 401(K) plans a “gold mine” for financial services companies. They can get a host of fees from these investments including legal fees, trustee fees, transactional fees, finders fees, bookkeeping fees. While 2 percent in fees may not sound like much, that money you’ve given in fees compounds over time, and you could be out a lot of retirement savings.
Oliver says that most managed funds do not do better than the market and many perform worse after fees.
Here’s Oliver’s advice on saving for retirement:
- Start saving now
- Probably invest in low-cost index funds and then leave your investment alone
- Make sure your advisor is a fiduciary
- As you get older, gradually switch more of your stocks into bonds
- Try to keep your fees under 1 percent; each one-tenth of one percent you pay in fees amounts to a lot of money you will not have in retirement