Do I need a financial advisor for my 401(k)?

Millions of Americans have 401(k) retirement plans through their employers, but many people aren’t quite sure how best to manage their investments. The different fund options may be confusing and it can be difficult to know how much money to put in different asset classes.

Here’s what to know about managing your 401(k) plan and how a financial advisor can help make sure you’re on the right track.

What is a 401(k) plan?

A 401(k) plan is a tax-advantaged retirement plan offered by employers. The plan allows employees to set aside a certain percentage of their salary each year for their 401(k), where the money can then be invested and grow tax-free until retirement age.

Many employers also offer a 401(k) match, where they agree to match a portion of the employee’s contributions. For example, an employer may match 100 percent of your contributions up to 4 or 5 percent of your salary, giving you a total contribution of 8-10 percent. Financial advisors say this match is like free money, because it is effectively a 100 percent return on your investment.

The main advantage of a 401(k) plan is that you won’t pay taxes until you start taking withdrawals during retirement, so your money can compound for decades. But you’ll need to select which investments to own in order for the compounding to occur, which can be intimidating for inexperienced investors.

Do I need a financial advisor for my 401(k) plan?

Some people will be able to navigate their 401(k) plan on their own, setting up their contributions and selecting investments from the list of fund options. You may even be able to get some free guidance from your plan administrator or from your employer.

However, some investors just aren’t comfortable making investment decisions on their own and may need a professional to guide them through their 401(k) plan. That’s where a financial advisor can be a big help. A good financial advisor will help you understand your 401(k) plan and select funds that make sense for your risk tolerance and time horizon.

Here are some of the ways a financial advisor can help with your your 401(k) plan:

Here are some key questions to ask a potential financial advisor before you agree to become a client.

How much does a financial advisor cost?

The main downside of using a financial advisor to assist you with your 401(k) plan is that it comes with a cost, which ultimately eats into the return you earn as an investor. That being said, a good financial advisor can more than justify their fee by helping you with your investments and keeping you on track over the course of your investing life.

Financial advisors can earn fees in a few different ways. Some earn commissions on the sale of certain financial products, which should raise flags of concern for clients. Commission-based fees incentivize advisors to put their clients in products that earn them fees and may not be the best options for the clients.

Fee-only advisors are paid directly by their clients, either as a percentage of assets under management, or at an hourly or annual rate. The fees can vary widely among advisors and it may depend on the level of service you’ll require as a client. In general, financial advisors charge around 1 percent of client assets.

If you’re just looking for help with setting up your 401(k), you may consider having a one-time meeting with an advisor and paying an hourly rate.

Bottom line

Whether or not you need a financial advisor to help with your 401(k) plan will depend on how comfortable you are choosing and managing investments. You don’t necessarily need to be a financial expert to handle it on your own, but if you’re totally new to investing, meeting with a financial advisor could be beneficial.

Be sure you understand how the advisor is being paid before agreeing to become a client. You’ll also want to decide if you’re just looking for one-time advice or are looking for an ongoing relationship.

If you’re looking for a financial advisor in your area, consider using Bankrate’s financial advisor matching tool.