PROS
CONS
AND
OF
401(K)
PROS
401(K)
CONS
AND
OF
BROKERAGE OPTIONS
BROKERAGE OPTIONS
Have you ever sat
down in front of
Netflix, Prime Video or
Disney+ and ended up
surfing for 45 minutes
while trying to decide
what to watch? Then you
just click on something to
end your indecision.
Maybe you'll land on a good
show. Maybe not.
Investing can be a bit like that sometimes. Take your 401(k), for instance. It may have a "brokerage window," "brokerage option" or "self-directed 401(k)" option that allows you to buy a much broader range of investments than traditional 401(k) options that are often heavy on seemingly dull target-date funds.
The 401(k) brokerage account option can be tantalizing. For some, it may even be a good choice. But for most of us, all those decisions can end up being a detriment. You have to be careful, given that this is your nest egg.
WHAT IS A
WHAT IS A
BROKERAGE ACCOUNT
BROKERAGE ACCOUNT
401(k)
401(k)
"The 401(k) brokerage option lets you treat your 401(k) like a typical brokerage account, which provides access to a much wider variety of investment options," says Wade Pfau, professor of retirement income at The American College of Financial Services. "Traditional 401(k) places typically only offer a limited
selection of mutual
fund choices."
These self-directed brokerage accounts permit plan participants to invest in publicly traded securities that aren't offered within the traditional investment menu provided by the plan sponsor, says Matthew Compton, director of retirement services with Brio Benefit Consulting.
"It is the individual's responsibility to ensure the investments they select are suitable for their financial situation including goals, time horizon and risk tolerance."
Brandon Tucker, manager of financial planning with eMoney Advisor.
And therein lies the double-edged sword that is the 401(k) brokerage option. "They can unlock interesting investment opportunities, but also come with heightened risk for investors," says Gaurav Sharma, CEO with Capitalize.
PROS
Potential Benefits
of 401(k) Brokerage Accounts
There's a reason investors may choose a 401(k) brokerage account. Several, actually:
They can unlock interesting investment opportunities.
But also come with heightened risk for investors.
You have the ability to choose from a wide range of investments that fit your situation. "Investors have more choices and can exert greater control over their portfolio, down to picking individual stocks," Sharma says. "More choice and control can be appealing to savvier investors."
You can trade actively while maintaining the tax advantages of a 401(k). For those interested in active trading, the brokerage option allows them to trade without worrying about the immediate tax impact, wash sale rules or the difference between short-term and long-term capital gains, Pfau says.
You don't have to go it alone; using an advisor is an option. "A lot of them can do the trading for you," says Tolen Teigen, chief investment officer with FinDec. "It's a way for a personal advisor to get in touch with your 401(k) and help with your trading."
Potential Risks
of 401(k) Brokerage Accounts
Of course, there's no such thing as a free lunch. These accounts have their drawbacks, too:
Without an advisor, you're much more exposed to risks. "If not professionally managed and done on your own, you run the risk of
mismanaging the 401(k) assets
and taking too much risk that
the 401(k) plan line up is
designed to help an
employee mitigate,"
says Marianela Collado,
CEO with Tobias
Financial Advisors.
It can be a time suck. "Many people don't have the time or expertise to manage their own portfolio efficiently, which could lead to taking on more risk than appropriate with what is oftentimes an investor's largest investment account," Tucker says.
There may be higher costs. "Depending on the brokerage option, the platform can and may charge trading fees and higher expense ratios on mutual funds you buy from that versus those from the short list," Teigen says.
You may trade too often. "Long-term, buy-and-hold investing is generally a better approach for individual investors," Pfau says. "This is easier to accomplish when there are just a few options, which can then only be traded after the end of the business day."
There might be too many choices. "Investors potentially expose themselves to much greater risk when they have a wide range of investment choices that haven't been curated," Sharma says.
Know Yourself
Know Yourself
The Takeaway:
The Takeaway:
"Those traditional options
can seem far more boring at
a time when stock market
bullishness is high, but
they typically come with far less volatility than bets on a meme stock or other individual investment picks," Sharma says.
If you like constantly educating yourself about individual securities and the wider market, and if you don't mind checking into your account more often or hiring and advisor to do that for you, then the brokerage option may be for you. At the end of the day, it's about knowing yourself and what kind of investor you are.
"We expect to see 401(k) brokerage accounts become significantly more popular in the years ahead as a result of the growing embrace of active trading by younger savers."
Gaurav Sharma, CEO with Capitalize.
But if you'd rather set your retirement account and forget it, then you'll probably want to pass on the brokerage option. The same goes if you have a low risk tolerance.
This infographic was designed by Avalaunch Media
