Does more choice offered through a self-directed brokerage window lead to better asset allocation for 401(k) participants? Based on what I’ve seen over the past few weeks, I’d have to say no. Having almost unlimited investment options can sound appealing to some employees, but unfortunately in many cases the employees are not putting in the time and effort they need to manage their accounts.
So what is a self-directed brokerage window? Some 401(k) plan sponsors offer their participants a window to a self-directed brokerage account (SDBA), which provides access to thousands of different investment options instead of just the standard 10 to 20 funds on the core investment menu. However, in many cases these core funds are well-rated funds with low institutional expense ratios. There are additional fees with the brokerage window that include administrative fees, transaction fees, and an annual account fee which can add a considerable additional cost for those employees who invest all or a portion of their 401(k) balance in the self-directed brokerage window, especially those who are excessively trading due to having so many choices.
This past month, I spoke to a few employees who have decided to try their hand at investing through their employer’s SDBA with mixed results. One gentleman had been following and copying the SDBA trades of a work buddy who had supposedly done quite well investing in oil and commodities funds. So well, in fact, that his buddy had just recently retired and is now no longer at work sharing his trading strategies, so now the employee is at a loss as to how to continue to manage and select his investments on his own.
Another employee shared with me that she had moved over 1/3 of her 401(k) to the SDBA and invested ALL of it in 1 stock last year – Apple. From a high of over $700 a share last September, Apple stock closed at about $460 last week. To make matters worse, another 1/3 of her 401(k) balance is invested in her own company’s stock, so having access to the unlimited menu of investment options in the SDBA did not in any way help her become more diversified.
About 1 in 5 employers currently offer a SDBA to their 401(k) plan participants, according to 401khelpcenter.com. If yours does, make sure your employees understand this option is for the more advanced investor who is willing to put the time and effort into researching and analyzing the options available within the SDBA, and that it is not for everyone. Having a financial coaching program or online advice tool as part of your retirement education is particularly critical in this situation so that plan participants have a lifeline to reel them in from the added risk of the SDBA.