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What is a 401(k)?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

You already know that saving for retirement is one of the most important financial decisions you can make. But how, exactly, should you go about it?

The best way to save for retirement is to invest your money so it can go to work for you. The magic of compound interest can turn today’s spare change into tomorrow’s nest egg.

If you’re a full-time employee, chances are the most readily-accessible investment plan available to you is a company-sponsored 401(k). But what, exactly, is that alphabet-soup-sounding retirement account? And how does it work?

What is a 401(k)?

A 401(k) is an employer-sponsored investment account. It helps you save for retirement by combining the powers of time, consistency, compound interest and hefty tax benefits to help set you up for your golden years.

Like other retirement accounts, 401(k)s are available in both traditional and Roth varieties.

In a traditional 401(k), your contributions are tax-deductible (and thus reducing your total taxable income for the year), and grow tax-free until you withdraw them — at which point they are subject to regular income tax.

With a Roth 401(k), your contributions will count toward your taxable income for the year, but they are not taxed upon withdrawal.

Your employer has control over whether or not to offer a 401(k), employee participation eligibility, and at what point the funds you contribute will be fully under your ownership — a process called “vesting,” which we’ll get to later in this post.

(Psst: if your employer doesn’t offer a 401(k) plan, you still have some valuable savings options.)

How does a 401(k) work?

A 401(k) is funded primarily by elective contributions — the portion of your wages that is automatically deducted from your paycheck each period. You have control over how much you contribute to your 401(k), although there are limits imposed by the IRS. For 2019, you can contribute up to $19,000 of your personal income.

Once the funds are deducted from your paycheck, they’re invested in a portfolio of your choosing. You’ll have the opportunity to choose from a variety of available options — an average of eight to 12 alternatives, according to FINRA. These may include individual stocks and bonds, but mutual funds are the most common option.

Depending on where you work, you may also have access to an employer match program — and if you do, it’s a very good idea to take advantage of it to maximize your 401(k) returns. An employer match means just that: your employer will match your 401(k) contributions — dollar for dollar— up to a certain percentage, which basically means free money to put toward your retirement.

Of course, employer matches aren’t limitless. The average match hovers between 3% and 6%, according to Malik S. Lee, a Certified Financial Planner at Atlanta-based financial advisory firm Felton & Peel. Some generous employers will match paycheck contributions up to 8%, or even higher — Lee said he’s seen some Georgia universities matching as high as 10%.

No matter how much — or how little — your employer contributes, it’s well worth it to take advantage of your employer match.

Say you’re making $30,000 and putting 4% of that toward your 401(k), for a total annual contribution of $1,200. An employer match of just 1% puts an additional $300 into your 401(k), which increases your total annual contribution to $1,500.

That might not seem like much. But thanks to the exponential nature of compound interest, that extra $300 could make a big difference down the road. After 10 years of contributions and investments growing at a relatively modest 6% annual interest rate, you’d have $15,816.95 without the employer match, but $19,771.19 with it. That’s a difference of nearly $4,000!

More on employer match programs: Getting vested

Not every employer allows new hires to start contributing to their 401(k) plan as soon as they start — and those who do may not grant ownership of employer contributions immediately. Vesting, the process of earning total control of your retirement account, means your employer’s 401(k) contributions will not be taken back or forfeited upon your resignation or dismissal. Remember, vesting applies only to employer contributions. You’ll always own 100% of the funds you put into your account.

Many employers will gradually vest their employers based on the time they’ve worked for the company. For instance, you may start at 0% and achieve 20% vesting after the first six months of employment, then 40% by the end of the year, and so on.

Other employers utilize a “cliff” method of vesting, wherein employees are 0% vested for a longer period of time (such as the first two years of employment). They achieve 100% vestment after a certain threshold (say, three years).

According to the IRS, “All employees must be 100% vested by the time they attain normal retirement age under the plan or when the plan is terminated” — that is, if the employer decides to end their 401(k) program entirely.

How much can you contribute to a 401(k)?

As mentioned above, there are limits to how much you can put into your 401(k) while still enjoying the tax benefits the account offers. The IRS sets these limits annually and they change from time to time.

For example, in 2018, employees could contribute up to $18,500 of their personal income to their 401(k) plans, but that figure has been raised to $19,000 for 2019. For more information on 401(k) contribution limits, see this MagnifyMoney article.

How much should you contribute?

The answer to this question seems obvious: as much as possible. But as in all parts of our financial lives, your mileage may vary depending on your circumstances. For example, you may still be paying down high-interest debt or trying to bolster your emergency fund, either of which makes hefty retirement contributions more difficult. Getting started is the key, because the earlier you start, the more time you’ll have on your side to take advantage of compound interest.

“You always want to put something away inside your 401(k),” Lee said. “Even if you’re trying to pay down debt or build your emergency reserve.” Ideally, you’ll want to meet your employer match if it’s available — but even if not, you should still contribute what you can.

Accessing your savings: How 401(k) withdrawals work

Generally, you can’t withdraw from your 401(k) savings before the age of 59 and a half without paying an additional 10% tax penalty. The withdrawal will also be taxed as regular income at the time it is taken out of the account.

However, you’ll be required to take minimum distributions once you hit age 70 and a half, unless you own more than 5% of the company or have not yet retired.

There are several exceptions in both cases. For instance, you may be eligible for penalty-free distributions before the age of 59 and a half if you can demonstrate financial hardship or you have a qualifying disability. (See the IRS guidelines for a full details)

You will also incur the 10% penalty if you take money out to perform an indirect rollover, which we’ll go over next.

Got a new gig? 401(k)s are portable

These days most of us hold more than one job over the course of our lifetimes. Fortunately, when you get a shiny new job, your old 401(k) can come with you!

The easiest way to bring your 401(k) funds along on your career move is to ask your account custodian to initiate a direct rollover. Your funds will either be transferred directly to your new account, or the custodian will write a check made out to the new account in your benefit. In either scenario, you’ll never have direct access to the money, which means you won’t incur any penalties or taxes during the process.

You can also opt for an indirect rollover, allowing you to cash in the account and then reinvest it manually; however, this route does come with some tax-related rules and limitations. The IRS requires the administrator to withhold 20%, which means you’ll receive only 80% of the amount you see reflected in your 401(k) account balance. In order to avoid the tax penalty and make up the difference in the form of a tax credit, you’ll need to reinvest the total amount within 60 days of initiating the rollover, which means pulling a potentially significant chunk from your own pocket. Since 401(k)s are eligible to be rolled over into just about every type of retirement account available, a direct transfer is a much more sensible option.

The 401(k) is the workhorse of retirement accounts — one of the most readily-accessible and powerful financial tools in the American earner’s arsenal. If you have access to one through your employer, start taking advantage of it today. You’ll thank yourself tomorrow.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
Jamie Cattanach |

Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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Review of Annex Wealth Management

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Annex Wealth Management is a full-service financial planning and wealth management firm. The firm has 36 investment advisors on staff and more than $2.4 billion in assets under management (AUM). Headquartered in Elm Grove, Wis., Annex Wealth Management primarily serves individuals, high net worth individuals, pension plans and profit-sharing plans.

All information included in this profile is accurate as of December 3, 2019. For more information, please consult Annex Wealth Management’s website.

Assets under management: $2,444,755,818
Minimum investment: No minimum requirement
Fee structure: A percentage of AUM, ranging up to 1.50% for investment management; asset-based, hourly or fixed fees for consulting services
Headquarters: 12700 W Bluemound Road
Suite 200
Elm Grove, WI 53122
https://annexwealth.com/
262-786-6363

Overview of Annex Wealth Management

Annex Wealth Management was founded in 2001 and is registered as an LLC in Wisconsin. The firm is headquartered in Elm Grove, Wis., and it has five additional locations across Wisconsin and an office in Naples, Fla.

Annex Wealth is owned completely by David J. Spano, the firm’s president and CEO. Annex Wealth is also the sole member of three other related companies, Annex Insurance Services, Annex Advisory Services and Annex Investment Services. The firm has 66 employees, 36 of whom perform investment advisory functions. It has more than $2.4 billion in assets under management.

What types of clients does Annex Wealth Management serve?

Annex Wealth Management serves a variety of clients, including individuals and high net worth individuals. In addition, Annex offers services to corporations and other business entities, estates, trusts, charities, pension plans and profit-sharing plans.

The firm’s primary focus is on individual investors, with individuals outnumbering high net worth individuals at a 4:1 ratio. This is likely the result of the fact that the firm does not have a minimum investment requirement, which makes it accessible to anyone interested in getting help from a full-service financial planning and wealth management firm. The firm does charge a maximum annual fee of 1.50% of assets under management, though Annex notes that this fee is negotiable.

Services offered by Annex Wealth Management

Annex Wealth Management offers a range of investment management and wealth planning services. For its comprehensive wealth management and financial planning services, the firm charges a “bundled” fee, which covers the ongoing financial planning and wealth management services that the firm selects for each client based on their needs. In general, the firm begins by offering financial planning services, which often lead to investment management and advisory services that are designed to help clients reach their goals. The firm’s financial planning services include retirement planning, risk management, estate and legacy planning and tax planning.

Annex also offers ongoing consulting services designed to provide insight and analysis to clients on their investments and financial situations. The firm then uses these insights to develop a plan to help clients achieve their objectives.

Additionally, Annex offers Ignite, an online investment management platform. While this service includes online investment analysis and account opening and transfer capabilities, it does not include Annex’s financial planning services. With Ignite, a client creates a personal profile, which is then matched to an actively managed model portfolio based on their risk tolerance. Clients who use this service have their assets held at TD Ameritrade.

Finally, Annex Wealth Management also provides pension consulting services to retirement plans that are covered under ERISA.

Here is a full list of services offered by Annex Wealth:

  • Investment management
  • Financial planning
  • Retirement planning
  • Objective risk management and insurance assessment
  • Estate and legacy planning
  • Tax preparation and planning
  • Financial education and discovery
  • 401(k) plans for businesses

How Annex Wealth Management invests your money

In general, Annex employs what it calls a “Core and Tactical Investment Strategy” designed to include short-term and long-term strategies that focus on risk management while at the same time promoting growth when it looks like there’s a new opportunity.

The idea behind a core approach is to focus on long-term strategies like more traditional asset allocation with stocks and bonds. On the other hand, a tactical approach is about short-term trades that are intended to capture current growth opportunities. As a result, you might end up with some of your portfolio being used to buy investments that might be traded again as quickly as a month. However, a good portion of your portfolio will likely be kept in assets designed to be held for several years.

Annex also focuses on selecting assets that are low-cost, even while using actively managed accounts. The firm attempts to balance risk with clients’ cash flow needs. While Annex mainly uses exchange-traded funds (ETFs) in its client accounts, it also makes use of individual equities, fixed-income securities, variable annuities, mutual funds and cash.

Fees Annex Wealth Management charges for its services

When calculating fees for its comprehensive wealth management and limited discretionary asset management services, Annex Wealth Management considers the types of assets used to accomplish client goals as well as the complexity and scope of the services and investments involved.

Annex charge a maximum fee of 1.50% of assets under management for its wealth management services, though the average fee that clients pay is typically around 1.00%. Clients are billed quarterly, and fees are generally deducted directly from clients’ investment accounts.

It’s important to note that clients might also incur other fees outside of the asset-based fee that the firm charges. For example, a custodial fee might be charged if you hold money with a third party, and there are mutual fund and ETF expense ratios to consider. There might also be markups and transaction fees when trading takes place outside Annex Wealth Management.

For its consulting services, the firm charges either an asset-based fee, an hourly rate or a flat fee. The flat fee for these services starts at $1,000 but can be higher, depending on the types of services provided. Clients who want the firm’s continued monitoring or management beyond the scope of the initial consulting services will need to pay an additional fee.

Annex Wealth Management’s highlights

  • No account minimum: Because there is no account minimum required to access Annex Wealth Management services, this makes the firm more accessible to all levels of investors. Some investors with fewer assets might struggle with a fee of 1.50%, but that fee is negotiable, so it could be possible to get a lower rate.
  • Variety of services for different needs: Annex Wealth Management offers a number of ways for clients to work with the firm, depending on their unique needs. In addition to comprehensive wealth management and financial planning services, Annex also offers the option of limited discretionary asset management services as well as consulting services. A range of financial planning services are available for both individuals and businesses.
  • Online portfolio management available through Ignite: The firm offers an online platform that clients can sign up for to get matched with a proprietary portfolio management services through Annex Wealth’s Ignite service. Fees might be lower, and clients can access generalized investment management services from their homes.

Annex Wealth Management’s downsides

  • Fees may be above average: Because there is no clear tiered fee structure, it’s possible that clients may end up paying above average compared with national average fees. Annex caps its fee for comprehensive management services at 1.50%, which is well above the 1.17% national average for RIAs.
  • No fee estimates provided: In general, you need to consult with an advisor before you can figure out which fees you’ll be charged and what your rate will be. Many other firms publish clear fee schedules based on the amount of assets a client has under management, making it easier to compare costs.
  • Potential conflict of interest related to fee structure: In its Form ADV (SEC-filed paperwork), Annex notes the potential for a conflict of interest to arise due to the fact that its financial planning clients often end up also receiving investment management services. Because the firm charges clients based on the amount of assets under management, it may be incentivized to make financial planning recommendations that will increase a client’s assets, whereas actions like gifting money or paying off a mortgage may lower invested assets. The firm does take steps to mitigate this potential conflict though.

Annex Wealth Management disciplinary disclosures

Annex Wealth Management has no disciplinary disclosures to report. The firm has a clean record with no prior legal or regulatory issues on its record.

Annex Wealth Management’s onboarding process

To get started, clients can fill out a form on the firm’s website. Information requested on the form includes:

  • Name
  • Email address
  • Phone number
  • Amount of investable assets
  • Where you’d like to have your visit
  • Whether you want an annuity review
  • How you found the page
  • Your age
  • Whether you have any particular concerns

Once you submit the form, someone from the firm will contact you about setting up an appointment to more fully discuss your needs. Annex also offers an online chat function that you can use to get more information about the firm.

The bottom line: Is Annex Wealth Management right for you?

For those looking for a more personalized approach to long-term financial planning and wealth management, Annex Wealth Management may be a solid choice. The firm prides itself on offering individualized solutions, rather than menu-based options, and there is no minimum investment required, which makes the firm accessible to all levels of investors. Even if you don’t decide to pay for investment management, it’s still possible to get fee-based consultation services from the firm.

However, it’s worth noting that the firm’s fees may be higher than average. Annex does not provide a fee schedule like many firms do, and while you know your fee will be capped at 1.50% for wealth management services, you won’t actually know your rate until you sit down with an advisor. Make sure you look around before you get started, as it’s a good idea to compare your options before making a decision about whether Annex Wealth Management is right for you.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

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Review of BBR Partners

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

With 115 employees across offices in New York, San Francisco and Chicago, BBR Partners works with extremely wealthy families and individuals — the minimum investment with the firm is generally $20 million. BBR partners currently manages nearly $16 billion for around 1,200 clients, working with them to create and execute a portfolio strategy with an emphasis on tax efficiency using third-party managers. BBR Partners also consolidates record keeping for its clients, allowing them to see the performance of their entire portfolio at a glance.

All information included in this profile is accurate as of November 26th, 2019. For more information, please consult BBR Partners website.

Assets under management: $15,886,200,000
Minimum investment: $20 million
Fee structure: Percentage of assets under management, performance-based fees
Headquarters: 140 East 45th Street
New York, N.Y. 10017
212-313-9870
https://www.bbrpartners.com/

Overview of BBR Partners

Founded in 1999, BBR Partners is a privately held multifamily office principally owned by Brett Barth and Evan Roth. The firm also has 17 equity partners. Co-founders Mike Anson and Todd Whitenack serve as BBR Partners’ chief compliance officer, and head of investment research, respectively.

BBR Partners has 115 employees across offices in New York, Chicago and San Francisco, 75 of whom perform investment advisory functions. The firm’s 17 partners have diverse backgrounds, including several lawyers, accountants and MBAs. Rather than directly managing client money, BBR works with third-party investment managers throughout the industry.

What types of clients does BBR Partners serve?

With a minimum account balance generally set at $20 million, BBR Partners focuses primarily on serving ultra-high net worth families and individuals, but it also works with their associated family partnerships, foundations and charitable organizations. The firm serves entrepreneurs, Fortune 500 and finance executives, and those with inherited wealth.

Services offered by BBR Partners

BBR Partners works with wealthy individuals and families to develop an asset allocation strategy based their investment objectives, selecting and hiring managers to put the tailored strategy to work. While asset allocation remains the firm’s primary focus, it may also offer guidance on other issues, including estate and tax planning, charitable planning and insurance planning.

The firm also offers comprehensive reporting services, allowing clients to see their entire financial picture, including assets under management by other firms.

  • Investment advisory services
  • Financial planning
    • retirement planning
    • trust and estate planning
    • charitable planning
    • education planning
    • tax planning and management
    • IRA and 401(k) rollovers
  • Insurance/risk management
  • Comprehensive reporting services
  • Collaboration with clients’ lawyers, accountants, etc.
  • Miscellaneous services, such as helping wealthy families vet their employees or connect with labor lawyers

How BBR Partners invests your money

BBR Partners crafts individual portfolios for each of its family clients with a variety of asset classes and strategies. Based on that family’s objectives, the portfolio will include a mix of individual equity and fixed-income investments, third-party managers, exchange-traded funds, exchange-traded notes and private investment funds. The same applies to individuals.

The firm uses a mix of passive and active strategies, as well as illiquid investments, with a focus on the after-tax returns of the total portfolio. It also offers socially responsible and values-based investing options to interested families.

Fees BBR Partners charges for its services

BBR Partners charges investment advisory fees that are based on a percentage of assets under management, with a minimum annual fee of $150,000:

Investment value of portfolio Fee (% of assets)
First $30 million 0.75%
More than $30 million — $150 million 0.50%
More than $150 million negotiable

Clients who invest in BBR-administered private investment vehicles pay an additional fee, ranging from 0.35% to 1.00%, on the balance of their investment in that fund. They also pay additional fees to any third-party managers, broker-dealers or custodians who manage their money.

BBR Partners highlights

  • One of the largest RIA firms (by asset size) in the Northeast, BBR Partners, consistently ranks among the top 10 firms on Barron’s list of top RIA firms.
  • BBR Partners acts as a “manager of managers,” which means it selects other firms to make investments for its clients. This BBR can offer a greater diversity of investment options while reducing the potential for conflicts of interest.
  • Turnover at BBR Partners is low — none at the partner level in its 20-year history.
  • BBR Partners does not have any disciplinary disclosures (see below).

BBR Partners downsides

  • BBR Partners has a minimum account balance of $20 million, which is beyond the reach of many if not most would-be investors.
  • The firm’s fees, as a percentage of assets under management, are lower than the industry average, but with a required minimum balance of $20 million, they amount to $150,000 per year or more.
  • The firm has a tiered fee schedule, so clients with fewer assets pay higher fees than they might at a firm with a different fee structure.

BBR Partners disciplinary disclosures

BBR Partners currently lists zero disciplinary disclosures. The SEC requires RIAs to report disciplinary disclosures on Form ADV. These include any regulatory actions, criminal charges, or legal developments like liens or civil judgments that have been taken against them.

BBR Partners onboarding process

BBR Partners meets with the family members of each of its clients to learn more about their goals for their portfolio. Based on these meetings, the firm creates and executes a customized, tax-efficient investment plan, working with multiple managers on behalf of its clients. In addition, depending on the needs of the family, the firm offers advice around tax and insurance planning, family education and charitable giving.

In addition to monthly statements, clients have access to a secure website, updated daily, where they can view their entire portfolio — including assets that aren’t managed by BBR Partners — at a glance.

The bottom line: Is BBR Partners right for you?

This firm focuses exclusively on high net worth families and individuals, including those managing the transition of wealth from one generation to the next. It provides personalized investment advice to those families and oversees the investment of their assets with third-party firms. Individuals whose family net worth is less than the $20 million minimum requirement need to look elsewhere.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Beth Braverman
Beth Braverman |

Beth Braverman is a writer at MagnifyMoney. You can email Beth here