How to Capitalize on a Self-Directed Brokerage Account in a 401(k)

Out of sight, out of mind. For many people, this is how their employer-sponsored 401(k) plan works.

The employee chooses from a limited menu of investment options, and as long as the account continues on a generally upward trajectory, the average investor has no reason to question their investment strategy or the administrative costs associated with the plan.

In fact, studies have shown that the average investor is completely unaware of their 401(k) fees. TD Ameritrade estimates that only 27% of registrants understand what they are paying for.

Whether you’re in mid-career or approaching retirement age, you want to get the most out of your money. If you’re going to pay fees on your 401(k), you might as well make those fees work for you.

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If your employer’s plan allows it — and a growing number of people do — it may be worth investing in hiring your own advisor. By doing so, you can put yourself in an ideal position to optimize your retirement plan and achieve your overall financial goals.

While not all employers offer the option to hire your own consultant, a growing number of companies have embraced the trend. In fact, about 40% of all US employers offer plan members the choice of a self-directed brokerage account, which may include the option to hire your own advisor.

Hiring a personal advisor has become so popular that some 403(b) plans now offer this option as well. If you’re wondering if you can hire an independent advisor as well, the best way to find out is to contact your plan administrator for a full list of options.

More and more 401(k) plans offer an alternative to the traditional list of pre-screened investments. This alternative is called a self-directed brokerage account.

Some SDBAs allow you to hire your own third-party investment advisor – a trustee who works for you, not the plan, guiding your investment strategy according to your wishes. By taking the self-directed route, investors gain access to a whole new universe of investment options, including mutual funds, exchange-traded funds, and a la carte stocks and bonds.

Given that nearly 40% of 401(k) plans now offer an SDBA option, one would expect to see widespread adoption of the self-directed option. Take-up remains low, however, as many people are not even aware of this option or know that they can hire a personal adviser.

Those who hire their own advisor can expect to pay a consulting fee. Some plans allow these fees to be withdrawn directly from the participant’s 401(k) account. Typically, an independent advisor will charge between 0.5% and 1% of total funds under management per year.

However, don’t let these advisor fees scare you off. In many cases, this price range is proportional to what investors are already paying under a traditionally managed 401(k). A 1% commission is the industry average. For small accounts, these fees can be as high as 2%.

With an SDBA, your fees will likely be lower than the industry average. In return, you will receive an exponentially increased level of value from your Private Advisor. In fact, a good advisor can add more than 3% to your value, according to several industry studies.

Although hiring an independent advisor is not a one-size-fits-all financial solution, it is a beneficial choice for many people.

So how do you know the SDBA route is for you?

The value and effectiveness of retaining your own financial advisor greatly depends on your career and income level. Generally, the more assets you have, the better it makes sense to hire a professional.

Similarly, professionals with demanding and time-consuming jobs, such as doctors or lawyers, might not have the time to manage their portfolios adequately, nor do they want to leave it to a former adviser as dictated by their employer. Advisors can also be a useful asset for those who want to elect an SDBA but lack the investment knowledge they need to build their portfolio successfully.

To determine if the SDBA route meets your needs, you need to determine your overall financial goals and then assess whether you have the time, resources, energy, and knowledge to manage your assets on your own. If you find yourself lacking one of these critical factors, but still want to retain a wider range of options and a greater sense of control, hiring an independent advisor might be the best bet. for you.

If you decide to enroll in an SDBA, what benefits can you expect? The answer is access to a wider range of investment options, to begin with.

A traditionally managed 401(k) plan has limited offerings, usually nestled within an organized set of mutual funds. An independent advisor opens the door to the full range of investment instruments such as ETFs, individual stocks and bonds, and even non-traditional opportunities such as real estate.

The individual attention of an advisor diversifies your investment options and, given the potentially lower fees associated with an independent advisor, an SDBA gives you more for your money.

As an ancillary benefit, personalized insights provided by your own advisor help you better track your level of risk adversity and how it changes over time. A personal advisor can give your account the time and attention it needs to thrive, helping you achieve your long-term financial goals.

An employer-sponsored 401(k) is a solid investment tool. There’s nothing wrong with that, but as your wealth grows, it’s in your best interest to review the details of your current investment plan with a critical eye on return, associated fees and value. global.

For investors who want tailored investment choices or more aggressive financial options, but don’t have the time and energy to commit to the process, hiring an independent advisor is the best possible choice.

— By Renée Pastor, Founder and Wealth Manager at The Pastor Financial Group