TRANSCRIPT:
Welcome back to Financial Foundations brought to you by Base Wealth Management, where we are the foundation to your financial plan. I’m your host, Dustin Taylor. I’m your co-host, Alex Wolfe, certified financial planner. And I’m Kyle Howell, financial advisor at Base Wealth Management. Today, we are answering questions from a listener, Yolanda. I want to thank Yolanda for sending in these questions. And if you have any questions that you’d like us to address on the podcast, you can send those in to question at basewealthmanagement.com. So, Kyle, can you give an overview of the different types of investment options available? One of the main investments that most people use are mutual funds, right? You have 401Ks, 403Bs, 457s.
Those lineups are going to be all mutual funds. You get a little bit more sophisticated outside of your retirement plan through work, and you have an IRA or brokerage account. And you might buy ETFs, or you might buy individual stocks, but for the most part, people are using mutual funds as their base of their financial portfolio. Yeah. So just to like elaborate, like those are different investment vehicles that you either have access to through your workplace retirement plan, as you mentioned, or if you have an IRA or brokerage account, you get a more of a variety of different investment options and you can access those through a broker or directly through the mutual fund company, which is kind of like the old school approach, which is going to be a little bit more limiting because you can typically only access the funds that that fund company offers. But if you’re going through a traditional broker, you’re going to have access to thousands of different types of investments and individual stocks, et cetera. Are there any investment options that are more suitable for someone with a smaller budget? Definitely the mutual funds where you can buy, you know, might be $25 a week or a hundred dollars a month, whatever that may be. Those are going to be kind of your entry level.
Yeah, I totally agree. Setting up like a $25, $50 a month, whatever you’re able to set away and have that automatically invest in a mutual fund is like that classic approach of setting it, forgetting it, choosing a good performing low-cost fund, and letting the market growth do the work. With these different investment options, what are some provisions that are in place to handle any unforeseen emergencies or financial hardships? Well, you definitely want to be investing, and most of these things that Kyle talked about are marketable. So they may not be liquid like cash, but you can sell them and have cash within a day or two. So you want something that is not going to be tied up, even if you only need to access those for an emergency, should you need to do so, you’d be able to sell it, although you may take a loss, depending on what happened in terms of the market during that time period, but you could sell it and get your money out relatively quickly. So if you do that, are there any penalties?
There could be. If you, we’re going to get in a little bit of the weeds here, but I do want to address this. If you bought a mutual fund and you sold it within 30 days, you could be subject to like a short-term redemption penalty. The penalty may be nothing, but you might get like a slap on the wrist and they will say, please don’t do that again. If you’re trying to access money that you put into like an IRA and you want to pull that money out early, there could also be a penalty if you’re accessing like retirement monies. What do you think, Kyle? Anything else there? On the first part there, when it comes to the mutual funds and if you’re buying, it depends on which class of mutual fund you’re buying. Are you buying a share class, like an A share class through a financial advisor that charges an upfront commission versus a back-end commission if you don’t hold it long enough?
There may be, you know, some fees involved there. I’ve seen, you know, a half a percent to, you know a 3% penalty for pulling those out within a short amount of time. If I’ve been working for a company for eight years and I suddenly changed jobs, what should I do with that retirement account? If you want to talk about options, you can leave the, you can leave the money in there as long as it’s over a certain dollar threshold, which I believe is $5,000. Um, the plan will allow you to leave the money in there. You can cash it out. You can pay your taxes.
You can pay your early withdrawal penalties. If you’re under 59 and a half, you can roll it over to an IRA or a Roth IRA, or you can roll it into a new employer plan. If you’re going to a new job, those are typically going to be your, your main options and figuring out which option is best is typically, you know, due for a conversation and figuring out what are your long-term goals for this money? In most cases, it’s retirement, but there may be other goals that, you know, somebody has that may want to access that money in a shorter amount of time. And maybe moving it to the new 401k plan might be a better better option in terms of being able to borrow from it in terms of a loan versus let’s roll it to an IRA where you may have a lot more investment opportunities, but you can’t borrow from it. You’d have to pull the money out.
If you need it, you’re going to have to pay taxes and potential early withdrawal penalties. Sometimes the 401k, a new 401k might make more sense or leaving it in there might make more sense. What’s the issue with leaving it in there typically? You’re still underneath the umbrella of your former employer. They still have control over your plan, so they have chosen the list of investments that you can choose from. They have also chosen the provider, so say your provider is Fidelity and your former employer now wants to move that plan from Fidelity to, I don’t know, Transamerica. Well now you’re more than likely going to have a whole new investment line up, and your investments are going to change due to no fault of your own. So you’re still under their guise as far as what to do with this money.
So when you sign up for your benefits and you’re enrolling in your retirement plan, what happens to your contributions? You’re subject to whatever you either select or whatever the default option is. As far as what you have access to, it’s whatever your company decided to allow inside that plan. As I mentioned earlier, you’ve got a variety of different mutual funds. Some plans offer a lot of different mutual fund options. Some offer very few. And almost all of them offer target date funds, where you choose, like, I’m going to retire in 2040, so I’m putting all of my contributions in that target date 2040 fund. And no matter what’s going on in the market, the fund manager of that target date fund has to follow the guidelines or the prospectus of that target date. So it’s not a great option.
It’s better than nothing, but it could either be way more conservative or too growthy depending on your preferences or goals, but you either can choose the funds or the default option is often one of those target date funds depending on your age and you should really be consulting with a financial professional to help guide you in your investment selection. Can you choose your own allocation? Most plans allow you to choose the investments according to what they have in the plan, how much percentage you put in this fund, that fund, and any of the funds. What sort of advice could you give someone who is looking to choose an allocation? First I would review all the available funds in the plan, kind of figure out what’s your goal. Do you align more with a growth investor, moderate, or are you someone who’s very weary about the markets and more conservative and you want to, you should really be talking to them.
That’s what I’m getting at, to select those types of funds of investments and we have technology now in our industry where we can link up to our clients retirement plans through their work and help make those investment selections very easily for them. So Kyle, why would someone not want to use a target date fund? Part of the reason I typically don’t steer my clients towards retirement date funds is in my opinion they’re a blanket investment. They are designed to do one thing and one thing only and this particular client may have more money in another account somewhere else and this investment is designed to do this one thing if all of the money was in that one investment.
So this one account may be either too aggressive or too conservative because of the way this fund is designed depending on their portfolio size. So somebody that has let’s just say five hundred thousand dollars and they’re starting new with a 401k plan and this $500,000 client is only 35 years old, well, they’ve already got a very substantial nest egg for their age range, so they don’t necessarily need to take on an absorptive amount of risk like a 2050 fund would be because of their age. They’re 15 years away from retirement, or actually, it’d probably be longer than that if I’m doing my math correctly. It’d be 20 or 25. Yeah, 25 years away from retirement, they don’t need to take on an absorptive amount of risk that that target date fund would be taking on because it’s so far out versus somebody that is, you know, 50 years old that only has $150,000, that retirement 2035 fund may be too conservative and not give them enough growth that they’re going to need because they don’t have the savings that somebody else does. If a company offers employee stock options, how can a financial advisor give it to them?
Any advice on those? What are some ways that they can help?
The number one thing I do with a client that either is already getting stock options or has the potential to is talk to them about like the risk of stock concentration. You want to make sure that the rest of their portfolio is not necessarily concentrated in that same sector or specifically that stock. So you want to have like a full approach on the big picture of the portfolio to make sure that the entire risk tolerance matches what they’re comfortable with because oftentimes you’ll find someone who’s maybe the executive at a company that has potentially a lot of money invested in that company stock is taking on way more risk than they realize. So if you work at company A and all of your employee stock is in that company, then you’re saying that a financial advisor would look at the whole picture of what the rest of your accounts are in and make sure that it’s not as concentrated to spread out the risk.
Correct. Or if you have a bunch of exposure and just stocks in general that you’ve got other types of investments, if appropriate, to further diversify your portfolio and create a more balance. Have you ever seen the case where someone has only stock options? Yes. I used to work for a large institution that managed a lot of 401ks and one of my elderly clients took on her deceased spouse’s retirement plan and it was 100% in company stock. What can you do in those situations if the company’s giving you the stock and I’m assuming you can’t move it out into something else? There could be some restrictions if it’s restricted stock shares. T
here’s some complications there that we can navigate with the client, but then you want to make sure that they’re not also investing in that stock in their 401k if they have thousands of shares of that in their stock plan account. And things can get more complicated when it’s a non-publicly traded company as well. It’s a privately held employee-owned company that can be a lot more difficult situation versus a publicly traded company where they allow the stock in the 401k. For example is Publix.
Everybody in at least in Florida or the southeast knows Publix grocery stores and it’s employee-owned and a lot of those employees have a very very large if not 100% it’s a very large percentage of their retirement money in Publix stock. Not that Publix is going to probably go out of business but there’s always that chance and then you can you know potentially lose millions of dollars. I’ve got a you know a couple of clients that are worth several million dollars it’s all Publix stock and we’ve had conversations around that and they’ve said okay let’s let’s diversify a little bit but it’s it’s a very hard conversation especially with somebody that’s been in a company for decades. They’re in love with their company.
They, you know, they feel like the company is going to treat them however they’re like a loyalty. Yeah They have the loyalty to the company and they don’t feel like if something happens to them, you know Then whatever is going to happen, so they rather hold on to that stock and it’s just an emotional decision Okay, I think I have the last question from Yolanda She asked can I transfer a portion of my retirement to another investment company that depends on Your age for one you have a age 55 rule and age 59 and a half It’s also very plan specific So each plan is designed differently. They have their own rules. Not every plan has the same rules. I’ve worked I’ve seen some plans where they Don’t allow for monthly distributions. I know this isn’t specifically addressing that question.
But when thinking about should you move some of the the process or some of the account balance to another company or IRA out of a retirement plan, as you mentioned, there may be a reason to, or maybe a reason not to, depending on your age, but also if that plan is very restrictive on how you can take your money out, you may also want to think about moving it. Yeah. And I’ve seen, I’ve seen plans where, you know, you’ve retired, you’re no longer working for the, for the company. You’ve decided to leave your money in the plan for one reason or another, but then it comes time to start taking withdrawals and the plan only allows you to take one withdrawal, right? Right. What am I supposed to do if by several hundred thousand dollars when I only need 10? Now I got to roll it to an IRA. My personal opinion is that sometimes they don’t want you to stay in the plan, even if it’s a really good plan and your advisor’s like, you should stay in the plan, but depending on the plan restrictions, there may be a little reason to stay, right? All right. That wraps up the questions from Yolanda. Thank you, Yolanda, for asking those. If you’d like more insights, there are various resources available on our website at basewealthmanagement.com.
You can subscribe to this YouTube channel or this podcast. Again, to reiterate, if you want us to address any questions or topics like Yolanda’s that you want to submit to us, you can send those to question at basewealthmanagement.com. I’m Dustin Taylor. I’m Kyle Howell. I’m Alex Wolfe. And happy listening.
