Retirement plans, such as 401(k)s, are helping Americans save more money to achieve their retirement income goals. Employers are increasingly adding features that can help employees maximize their savings and differentiate their benefits from other companies. However, there are many features to a retirement plan, such as a 401(k), that many participants aren’t completely knowledgeable about or understand. This specific article is about one feature that some 401(k)s have available and can help add diversification as well as provide investments that are different than those in the retirement plan menu. A Self Directed Brokerage Account (SDBA) within a retirement plan is a unique feature that employees can use to gain access to investments of their choice that are not the same as the pre-selected investments.
Traditionally, 401(k) plans have a menu of mutual funds, or in some cases, ETF’s that are available to plan participants. Depending on the plan, you might have options to educate yourself to construct your own portfolio, are provided with a qualified default investment alternative and/or have access to a portfolio manager to manage from the available investments. The option for the SDBA is a unique feature that allows for a participant to go beyond the investments in the company retirement plan and select their own investments. For example, instead of investing in mutual funds or ETF’s you could buy others you prefer or individual stocks directly within the retirement plan. These choices have pros and cons, just as any of the other options within the 401(k).
Managing the SDBA can be done by you or by an investment manager to which you have granted authorization. Managing the self directed brokerage account by yourself requires a lot of detail and places the risk on yourself versus anyone else. You would be in charge of selecting the investments as well as monitoring and making changes as needed on an ongoing basis. This is something that requires your diligence and time. Having an investment manager take on the responsibility of overseeing the investments can help you not have to be so actively involved in the process. An investment manager would first conduct a risk tolerance to determine your financial goals and when the money would be needed. Then, would manage the investments accordingly on your behalf.
Some other things to consider are in the world of trade fees becoming low to $0.00, generally, the option of this feature might not be the case. Depending on the clearing firm, such as Fidelity, Schwab or others alike, you might have to pay a trade fee or commission, which is not the case when buying the traditional investments inside of your 401(k). However, there are SDBA plans that have negotiated fee schedules with certain investment managers and have access to specific investments. The fee that an investment manager charges might be in the range of 2% per year for the assets under management, which might be in range with the total fees that are within the investments in a retirement plan.
If a SDBA is something that appeals to you, you should review the plan information and the custodian details to determine if it is something that will help you with your retirement planning goals. Additionally, how you have the account managed is pretty important. Such as, will it be you or an investment manager and the strategy. The custodian would be able to help you with details of the platform to help you stay compliant with the self-directed brokerage account. If considering working with an investment advisor, make sure that they are familiar with how these plans work, how they can help you and how they are compensated.