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A 401k is a great thing but is there a tool to make it even better? We wanted to find out. Check out our Blooom review: is this 401k manager worth it?
An Easy Way to Invest
If your employer offers a 401k, it’s a great way to invest and the first experience of investing for many people. The money is out of your paycheck before you even see it so for those whose paychecks burn a hole in their pockets, it’s a great method of “forced” saving.
But what if there was a way to make your 401k work even harder for you? That’s what Blooom says they can do. We were intrigued and wanted to find out more so we decided to do an in-depth Blooom review.
A 401k is a retirement savings vehicle that some employers offer to their employees. Retirement investment accounts are tax-advantaged. A percentage of your paycheck is invested pre-tax, it grows tax-free, and you don’t have to pay taxes on it until you start making withdraws after age 59 1/2.
Because most people will be in a lower tax bracket after retirement, they will pay less money in taxes when they withdraw it to live on during retirement than they would have paid on it during their working life if that money hadn’t gone into a 401k.
If you withdraw money from your 401k before age 59 1/2, not only will you have to pay taxes on it, you will also be subject to a 10% early withdraw penalty.
There are some circumstances though under which the money can be withdrawn without the 10% penalty; you die, and the money goes to a beneficiary, you become disabled, you retire and are at least age 55, your withdraw is for a medical expense, and within the dollar limit for that kind of expense, you begin substantially equal periodic payments, or the withdrawal is related to a qualified domestic relations order.
While you won’t face the penalty, you are losing out on time, the time your money needs to grow to support your retirement.
Another advantage of a 401k is its ability to lower your taxable income. If you earn $4,000 a month and $1,000 of that goes into your 401k, you only have to pay taxes on the remaining $3,000 rather than the entire amount.
If you’re fortunate, your employer offers a matching program. For example, if you invest 6% of your income, your employer contributes 3%. This is great because the match money is free money!
401ks are exempt from creditors and bankruptcy, so they offer protection should you find yourself in dire financial straights.
There is a maximum yearly contribution for 401ks, sometimes it stays the same for a few years and sometimes the limit is raised. For 2018, the limit is $18,500, up from $18,000 in 2017.
If you’re aged 50 or over, you can invest an additional $6,000 as a “catch up contribution,” and that number didn’t change from 2017.
Most 401k programs will offer employees a few different investment options to choose from. The plans are usually mutual funds which contain a mix of stocks, bonds. and money market investments.
But if you’re new to investing, how do you know which to pick? You don’t want to miss out on an opportunity, but you don’t want to make a poor choice either. Blooom helps people choose the right fund and manage it.
In Comes Blooom
Blooom was planted (haha! See what I did there?) in 2013. The goal was to help people manage their 401k accounts. Blooom is a fiduciary which means they must recommend investments that are beneficial to you and not investments they have some stake in (like earning a commision from that investment).
For a flat, monthly fee of $10, Blooom will use an algorithm to set the allocation of the investments within your chosen 401k to maximize your returns.
Blooom does this for you which separates them from 401k analyzer programs that look at your 401k and then suggest changes based on your retirement goals. You have the information, but you have to make the changes yourself.
Blooom does the work for you! To get started, you’ll give Blooom the information you use to access your 401k account online. Blooom works with almost all online 401k providers.
The company also provides the same services for similar accounts like 403(b)s, 457s, 401(a)s and thrift savings plans. There is no minimum amount you’re required to have in your account to work with Blooom.
Blooom will do a free review of your 401k as it stands and tell you how good or bad it is, ie how much you’re paying in fees (fees, even seemingly small ones can really chip away at your retirement money over time), if your investments are well diversified (so you’re not putting too many retirement dollars in too few baskets), and your current allocation (how your fund is split between the various investment classes. As a general rule, the closer you are to retirement, the safer i.e. more heavily invested in bonds than stocks, your investments should be).
Based on your current age and the age at which you’d like to retire (you have to do a bit of crystal ball gazing to answer this if you’re pretty young) Blooom will provide recommendations to improve your 401k.
If you want Blooom to help improve your 401k, you can sign up.
Blooom will make the adjustments that were recommended to you within 30 days. The algorithm recommends the changes, but one of Blooom’s licensed financial advisors will go over your portfolio before any changes are made.
And the work Blooom does on your 401k doesn’t end there. Every 90 days, your allocations will be rebalanced. This is important because the ups and downs of the market can mean your target allocation (70% stocks, 30% bonds for example) shifts over time.
These shifts can mean your portfolio is no longer on track to match your retirement timeline and goals. This rebalancing keeps the allocations you set within your portfolio steady.
Blooom offers plenty of customer support. You can email or phone a financial advisor about your account and other retirement and personal finance related questions! And you thought personalized financial advice was only for rich people!
The Pros of Blooom
There aren’t a lot of companies doing what Blooom does, 401k management is very niche. Blooom found a hole in the market and filled it. I don’t know why more companies aren’t wading into 401k management.
Because it’s the first investment account many people have, the users are often unsophisticated when it comes to investing and could use some guidance.
Blooom fills this gap and perhaps a larger gap of those who can’t afford personal financial advice. A flat fee of $10 a month isn’t a bad price for these services.
And the $10 fee doesn’t come out of your investments; you pay it with your bank account or credit card. This means more money growing over time in your 401k.
Think of all the dumb, unnecessary stuff you spend $10 a month (or more!) on. The Planet Fitness membership you rarely use, the snacks you buy each time you get gas, the vegetables you buy and don’t use in time before they go bad.
$10 a month is a pretty small price to pay to make sure something as important as your retirement account is being maximized.
If you’re new to a 401k and don’t have much money invested yet, $10 a month can be expensive percentage wise to how much is in your account but as that money grows, (and you may have 40 years before you retire) that $10 a month may be a drop in the bucket compared to what a percentage based fee would be.
The $10 monthly fee is Blooom’s only source of revenue. As fiduciaries, they are not allowed to make money based on recommendations they make so you can be assured that their recommendations are in your best interests.
The rebalancing that Blooom performs every 90 days is important. Good investors don’t tinker around with their allocation in reaction to the market.
You set the allocation based on your goals and leave it alone, shifting only as you get closer and closer to retirement. But even if you don’t touch the allocation, market ups and downs change it for you. The rebalancing keeps your allocation where you set it.
Rebalancing isn’t the only reason Blooom is monitoring your 401k. They also use virus scans to ensure that your account is protected against hackers or any other kind of fraud. The site also uses bank-level encryption to keep your data safe. And while Blooom can manage your account, they can’t withdraw any money from it; only you can do that.
Blooom works with all 401k plans that have online access which means nearly all of them so the service is available to most people.
You don’t have to subscribe to the service in order to get an analysis on the health (or lack of it) of your 401k. You can look at the recommended changes and make them yourself if you’re more of a DIY type of person.
Just finding out how much you’re paying in fees is worth letting Blooom have a look at your account because 401k fees can really hinder your savings goals.
Some 401k plans are not great. They have high fees or are not well diversified.
Blooom can show you the best option among those your employer offers but you may decide that the choices are so bad that you’d be better off foregoing a 401k altogether (or just contributing enough to get the free match money) and instead investing in an IRA which is another type of retirement account.
Blooom has calculated that their average client will save $41,000 in investing fees over their lifetime. Prior to using Blooom, the average client was paying 0.56% in 401k fees each year.
After following Blooom’s recommendations, that number dropped to 0.22% per year. I know both of those numbers look small, but over a few decades, the difference translates into a lot less money in your 401k.
If you do sign up for the service and are unhappy with it for some reason or simply feel like you can handle managing the account on your own, you can cancel your account with Blooom at any time. It’s a month-to-month service so there is no contract and no fee to cancel.
Cons of Blooom
Blooom only deals with 401k and a handful of other similar retirement accounts. If you have a Roth or Traditional IRA as part of your overall portfolio too, Blooom won’t manage those for you.
Because of this, Blooom doesn’t take any other investments in your portfolio into account when making allocation recommendations. That can mean your portfolio as a whole is not correctly allocated or diversified.
I don’t feel that Blooom gathers enough information about customers to provide asset allocation advice. Your allocation (risk level) is only based on your age and your estimated date of retirement.
Additional questions about things like short-term goals (do you plan to get married, buy a home, have children, etc) and long-term goals (starting a business, paying for a child’s education) would better customize the advice Blooom gives.
As we explained above, if you take an early withdraw from your 401k, you’ll be penalized so it’s an account only for long-term money.
Those unfamiliar with investing may put all of their investment money into a 401k not realizing that it isn’t meant for short-term or even medium-term money. Blooom should provide more guidance on this when assessing clients.
Blooom’s recommendations aren’t typically for the risk adverse as they heavily weight portfolios towards stocks over bonds. Blooom does this because so many people tend to be more conservative in their allocation than is appropriate for their time horizon.
I actually think this is a good thing because many people are indeed not aggressive enough but if the idea of being more aggressive than you are comfortable with is just not tolerable to you, you might be unhappy with Blooom’s recommended allocation.
For younger clients, the recommended allocation is 100% stocks but the stocks are diversified. Blooom chooses large, mid, and small cap domestic stock funds as well as some international stock funds and sometimes alternative funds too.
Remember though, the allocation is only a recommendation, in the end, the final decision is always your own.
Who Is Blooom Best For?
If you’re new to investing and unsure of yourself or if your 401k is your only investment or retirement account, Blooom is ideal for you. Investing can be confusing and Blooom provides valuable advice and guidance for those who feel a little overwhelmed by it all.
The worst thing you can do is just decide not to invest because the longer your money has to grow, the more you’ll have.
Blooom can not only help you get the most out of your 401k but can offer financial advice on a variety of other personal finance issues as well.
If you’re not new to investing and feel pretty confident that you’re on the right track, we still recommend that you take advantage of the free assessment Blooom offers. It might show you things you were previously unaware of no matter how carefully you read the prospectus. (No one reads the prospectus!)
Do We Recommend Blooom?
Yes, Blooom is a legitimate service. They fill a big gap in the world of investment advising. For many people, their 401k will be their primary or only retirement account so they need to get it right. Blooom can help you do that.
Check them out, remember, it’s totally free to get an assessment of your 401k so you have nothing to lose.