Is a Self-Directed Brokerage Account Right for You?

Contributing regularly to an employee sponsored retirement plan, such as a 401(k), 403(b) or 457(b) account, is the foundation of retirement savings for many people. You determine the percentage of each paycheck you want to contribute, and you either select a target-date fund based on your expected year of retirement or pick from a relatively limited selection of mutual funds. Generally speaking, if you do not make a selection yourself, you’ll be place in a traditional target-date fund.

But what if you had more control? Suppose you’re a do-it-yourselfer in other areas of your investment plan. In that case, the limited options in a 401(k) can be very constraining – especially when it is often your most significant investment pool. If you prefer to have someone else manage your investments, you may be able to find an advisor that will make recommendations inside your plan, but again, they will be limited to the small pool of investment options.

If you have multiple plans from different employers or a concentrated stock position, it can be difficult to line your 401(k) investing up with your risk tolerance and overall financial picture.

There is another option for investors whose employers offer a “Self-Directed Brokerage Account”.

The Basics of the Self-Directed Brokerage Account:

Self-directed Brokerage Accounts (SDBA’s) are a window inside of your current 401(k)/403(b) account. So there are no changes in regards to automated payroll deductions, and they have the same contribution limits, withdrawal rules, and penalties, and the rollover rules are the same.

The difference is that instead of being limited to whatever funds the administrator has chosen for you, your options are vastly expanded.

Individual stocks and bonds are often available, as well as mutual funds and ETFs. This flexibility means you can craft an investment strategy that more closely mirrors your risk tolerance, goals, and values. It also means that you can view your entire financial picture holistically, and your retirement assets can be available to help you solve other portfolio problems.

The Rules Are Simple But Can Have Large Implications.

Imagine you have a sore throat believe it to be caused by a strep infection. Let’s say you go to your medicine cabinet to look through your treatment options: you see ibuprofen, Tylenol, Nyquil, and Hall’s Cough drops. While a combination of these options may help you temporarily feel better, they are by no means the best treatment option that exists. You need to see a professional.
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​Using a self-directed brokerage account is metaphorically like moving from the medicine cabinet to a drugstore or doctor’s office. Instead of your investment selections being limited to what your administrator has chosen to allow, you can open up access to almost anything on the market.

Furthermore, some plans allow you to have a licensed, fiduciary advisor manage the investments for you inside of that plan. So instead of using the medicine cabinet or visiting the drugstore alone, you can see a “financial doctor” to walk you through a “treatment plan”, personally tailoring an investment lineup with you.

The rules are simple: your contributions never leave your retirement account and you can see performance at any time like usual; but now you have a professional that is on-call for this account. 

Understanding the Risks

One of the benefits of using a target-date fund or selecting from among the funds an employer or administrator has identified for plan participants is that you have some assurance that they have been vetted and are appropriate. This can be a big time-saver. Identifying investment options, researching stocks, bonds or funds, determining the right asset allocation – and then constantly evaluating the performance and risk in light of market conditions – can be a big responsibility. For most people, the advantage of the 401(k) is the “set it and forget it” convenience.

You’ll be taking on the responsibility for your retirement savings, and a mistake can be very costly. This may not be an issue if you successfully manage investments for yourself. But if you aren’t very familiar with investing, you may want to work with an investment advisor.

Retirement savings is, for most people, a very long-term investment. You’ll want to be sensitive to the selected funds, how much they cost, and how your advisor gets paid. Working with a fee-only financial advisor that gets paid for providing advice and who acts as a fiduciary to always put your interests first is a smart way to build some safeguards into your account.

The Bottom Line

A self-directed brokerage account can offer a way to craft a highly individual investment strategy that works to help you achieve your goals. But it can be complicated to understand what is allowed, and managing the funds in the account requires time, effort, and know-how.

The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA