There's a little-known investment option in your 401(k) plan

A self-directed brokerage account is the most underrated investment option in a 401(k) plan. That's assuming, of course, it's even made available to the employee.

Basically, self-directed brokerage accounts inside 401(k) plans offer participants a "brokerage window" where they can trade investments (stocks, bonds, mutual funds, etc.) that aren't in a plan's official investment lineup.

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The benefit of a brokerage window is that it can provide a participant more choices and better control than the limited options on their 401(k) plans. However, let's be clear that the brokerage window isn't for everyone.

For individuals who have investment experience, the brokerage option offers the opportunity to fine-tune an asset-allocation strategy. In the hands of the right people, it can be a very cost-effective and precise way to manage retirement money.

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Brokerage windows enable investors to choose from thousands of investment options. But the sheer numbers can make it more difficult for inexperienced investors to choose suitable investments.

In short, the self-directed brokerage option gives an investor access to a broad range of investment by way of a brokerage account versus the limited lineup offered by a 401(k) plan. It offers all the same benefits, including tax deferral and the convenience of making contributions through payroll deductions.

Self-directed brokerage accounts were popular in the 1990s, and today about 20 percent of employers offer it as an option. However, popularity has grown over the years, opening new possibilities as to how someone can invest his or her 401(k).

Only an employer's plan administrator can make self-directed brokerage available to an employee. If available, it can be found by accessing the account online. However, I urge employees interested in a self-directed brokerage account to reach out to their human resources department to know for sure if this option is available.

The brokerage window offers more flexibility by gaining access to a universe of investment options but may expose investors to risks and fees they are not used to. It's for this reason that individuals should consider consulting with a 401(k) provider and/or financial advisor before making any investment decisions.

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Meanwhile, the Department of Labor continues to criticize the brokerage account window, because studies show that larger numbers of investment choices confuse most participants. In addition, minimal guidance on selecting suitable investments is offered.

The Department of Labor's solution is to make the self-directed option more burdensome and expensive for the employer in anticipation that they'll drop it from their plans.

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But the Department of Labor fails to recognize the opportunities the brokerage window can offer.

For example, this option is also a means to access strategies offered by third-party professional money managers to actively manage an individual's investments on his or her behalf.

These managers charge fees for their services, but so do the mutual funds and other investments that people own inside and outside the 401(k) plan. When costs are compared, investors might find that they are receiving higher-quality services for their money by hiring professional money managers to manage 401(k) plans for them.

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Another attractive feature offered in a self-directed brokerage account is the flexibility to invest only a portion of 401(k) assets, as opposed to the entire account balance. This feature allows for moving assets between the employer's investment lineup and the employee's self-directed brokerage account as desired.

This gives someone the option to invest a fraction of the account on their own while allowing a professional to manage the rest. Most money managers work directly with a person's financial advisor, so it's important to partner with a trusted advisor if someone selects this option.

"Whether someone is making investment decisions on his or her own or not, it's important that the 401(k) investment is given an appropriate amount of ongoing attention."

Advisors should be fluent in self-directed brokerage, with an established solution in place. They should have adequate infrastructure to support this kind of business, as well as partnerships with money managers capable of accessing 401(k) plans.


The 401(k) will be a significant source of income in retirement, so the more disciplined people are by investing early in life, the more likely they will meet their goals when they retire. Many people are not confident they can do this on their own, so they turn to an advisor for guidance.

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If investors decide to consult with an advisor, it's suggested that they meet with someone with whom they are personally comfortable and who understands the specific financial situation.

Once an advisor has a grasp on the individual's financial situation and distinguishes his or her goals, a risk assessment should be done to determine a proper asset allocation and then recommendations on investments.

—By Andy Roberts, financial advisor/portfolio manager at Charleton Financial.