For many years the investment options offered in employer-sponsored 401(k) plans were limited to mutual funds and annuity contracts, along with one or more guaranteed accounts and, perhaps, the company’s stock. However, some plans now allow participants to buy and sell securities inside their 401(k)s. The option is known as a self-directed 澳洲幸运5官方开奖结果体彩网:brokerage account (SDBA) or a 401(k) 澳洲幸运5官方开奖结果体彩网:brokerage window.

This alternative has raised a few eyebrows in 澳洲幸运5官方开奖结果体彩网:fiduciary circles, as it allows investors to take much greater risks with their retirement savings than they previously could, with even the most aggressive fund choices. Those 401(k) participants who have 澳洲幸运5官方开奖结果体彩网:this option available to them need to carefully evaluate the possible gaiꦐns—an🐲d losses—that they may sustain from their trades.

How a Self-Dir♋ected Brokerage Account in a 401(k) Plan Works 

Employers who offer self-directed brokerage accounts in their 401(k)s must pick a specific firm to use, such as E*TRADE or 澳洲幸运5官方开奖结果体彩网:Charles Schwab, and list this account along with the other investment choices in the plan.꧂ In some cases, participants may have a specified window of time each year to move money from their general omnibus account in the plan into the brokerage account.

Plan participants can then buy and sell stocks, bonds, 澳洲幸运5官方开奖结果体彩网:exchange-traded funds (ETFs), and 澳洲幸运5官方开奖结果体彩网:mutual funds in the normal manner, albeit with no tax consequences. However, some types of higher-risk trades are prohibited, such as 澳洲幸运5官方开奖结果体彩网:trading on margin and buying 澳洲幸运5官方开奖结果体彩网:put or call options or futures contracts. 澳洲幸运5官方开奖结果体彩网:Covered call 💟writing is permissible unless the pl🔯an’s charter forbids it.

38.8% of respondents offered brokerage windows in their 401(k) account, according to a 2023 survey by the Plan Sponsor Council of America.

Pros and Cons �🐭�of Using 401(k) Self-Directed Brokerage Accounts

There are꧙ several advantages and disadvantages of usඣing self-directed brokerage accounts in 401(k) plans.

Pro: More Choice

In their favor, brokerage accounts allow investors to choose from a 𓂃vast array of investment choices, ones that 🎃permit them to invest in specific sectors, subsectors, or other elements of the market that may be very difficult to duplicate with traditional plan alternatives.

Participants who🔴 wish to invest in frontier markets will quickly be able to find an appropriate stock or ETF that fits their investment objective. Those who choose wisely may be able to grow their retirement portfolio faster than through the choices available to members of an employer-organized 401(k) plan.

Con: Risky for Inexperienced Investors

Of course, having that level of freedom is not always good. Because 401(k) plans are nondiscriminatory by n🎃ature, most plan charters require that these accounts m📖ust be offered to all employees in a company—including those with little or no knowledge or experience with investments. In many cases, the plan feature was added because a few top-level employees lobbied for it, and then they paid for—and followed the advice or strategy of—a professional money manager.

“It was a standard plan design, especially for law firms, historically,” says David Wray, president of the Plan Sponsor Council of America (PSCA), which represents companies that offer 401(k) and profit-sharing plans. Even today, “the people who use [brokerage windows] are typically ꦆhighly paid—not your typical 401(k) participant going into a target-date fund,” Wray adds.

Winners and Losers 💫With 401(k) Brokerag🗹e Accounts

It is easy to see who could come out ahead by trading securitie💖s in a 401(k) brokerage account. Highly educated investors and those with previous trading and investing experience can use these accounts to achieve returns far beyond what they might be able to achieve using traditional plan options, such as mutual funds.

Still, may employees lack such expertise. Employees without adequate knowledge and guidance could easily be enticed into making foolhardy choices, such as buying and selling mutual funds with front- or back-end sales charges o𓆏r choosing investment options that contain risks they do not understand.

So far, most studies and data released on this subject seem to indicate that a relatively small percentage of employees choose to invest material amounts of their plan savings int💜o brokerage accounts. Vanguard, Fidelity, and Schwab have all stated that only a very small fraction of their customers with access to brokerage accounts inside qualified plans hav🌃e signed up for them.

The Bottom Line

Brokerage accounts can be a good idea for 401(k) plan participants who are experienced and knowledgeable investors. Employees who lack the education to make sound investment decisions by themselves should probably thinꦺk twice before taking this path. Investors should also watch extra fees that could be assessed when taking this route.

One good way to limit risk with these accounts is by restricting the amount of money that goes into them. Participants who allocate the majority of th🐬eir plan assets into other investment alternatives and trade sparingly may see much better results. For more information on the use of brokerage accounts inside qualified retirement plans, consult your plan sponsor or financial advisor.