The Elusive Self-Directed 401K Brokerage Option

The other day I was searching through the 401K section of my employer’s intranet and was shocked and delighted to find that employees are now offered a self-directed 401K brokerage option through Vanguard. I have been asking for this option for over a year, when I found out that these accounts even existed. Not surprisingly, there was no publicity on the matter (and you’ll see why as you read on). Should you start a self-directed 401K? I’ll answer that question below.

What is a Self-Directed 401K Account?

First, let’s consider your typical 401K account. Most employers have a standard 401k that offers anywhere from 10-20 mutual funds within it. Most of these funds are a combination of:

  • carefully (ideally, but not always) chosen funds by your employer and plan administrator to limit your risk for liability issues if you lose money.
  • funds pushed upon your employer by your plan administrator for whatever reason (sales kickbacks, low assets in their own funds, etc.).

Often, the funds selected are decent options for the uneducated, beginner, and even intermediate investor. But, if you’re an experienced mutual fund investor, having only 10-20 funds to choose from can be somewhat limiting. For a young and experienced investor who wants to add a little more risk due to the many years of investing ahead, the limited options can be limiting.

A self-directed brokerage account option simply opens the door to more fund options so that you can more freely choose where to place your assets and how to distribute your risk. It is a little-known way to significantly improve your 401K.

self directed 401K

What a Self-Directed Brokerage Cannot Do

Very little. It’s possible that the 401K administrator doesn’t have a full range of investment options (e.g. ETFs, stocks, MMAs, or CDs), but if it does, you can pretty much invest in whatever you would like.

If a Self-Directed 401k Sounds Appealing to you…

First, check to see if your employer has one. In my research, I discovered that less than 20% of employers do. If your employer does offer it, don’t expect them to be vocal about it. This type of account is an option that is for those who are looking for it, not the masses. Do some digging.

If your employer does offer a brokerage option, be honest with yourself about your investing skill level. There is good reason why most people are very limited in their fund choices. If you fall into that category, there is no shame in that, you’re with the large majority.

If you have the option and want to move forward, carefully read all of the fine print. There may be higher fees involved, especially if you switch in and out of funds often. Make sure that you’re doing it for the right reasons and being smart about your choices. Do not turn a self-directed 401K into a day trading account. Continue to invest passively for the long-term.

Self-Direct Brokerage Account Discussion:

  • Does your employer offer a self-directed 401k option?
  • If so, did you know about it before this post?
  • Would you like the option, or are you content with what you are currently offered in your 401Ks fund selection?

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