One popular reason investors give for not funding their 401-k plans has been limited investment choices. This excuse is often the reason that all of the great benefits of the 401-k get ignored, such as an up-front tax-deduction, tax-deferred growth, and company matching and profit-sharing features (free money, anyone?). Or, almost as bad, the 401-k does get funded, but then it sits in cash or in company stock.
Yes, it’s true. Company-sponsored 401-k plans sometimes do have poor investment choices. However, there is a trend underway, especially in larger company plans, that allows an employee to side-step the problem altogether: many providers are now offering “self-directed brokerage accounts” inside of the plan.
A brokerage account is simply an account, held at a brokerage firm, that allows the account owner to buy a vast range of financial products–stocks, bonds, mutual funds, etc. So by having a brokerage account within a 401-k, you keep all the tax advantages of a retirement plan, and also get access to a very wide range of investment products.
So why would an employer want to add a brokerage option to their 401-k? It’s actually very simple: employers have a legal responsibility to provide suitable menu of investment choices inside the plan, so by providing a brokerage option, they are basically “checking that box off” from a legal standpoint. From their standpoint, they have provided a nearly unlimited menu to the employee; now it is up to the employee to decide what to invest in.
Not sure if you have access to a self-directed brokerage account? Check with your HR department or plan administrator. We have seen them added to plans from Fidelity, Wells Fargo, Hewitt Associates, TD Ameritrade, Charles Schwab, and more.
If you do have a brokerage option, and need help deciding how to invest, you might consider hiring a professional. This is just another way a qualified and trusted advisor can help you get where you are trying to go.