Self-Directed 401k Investing
Many 401k participants have a little-known feature available to them that dramatically increases the number of investment options and, by extension, increases the quality of their options. This feature is available at major employers such as The University of Michigan, Michigan State University, Lansing Board of Water and Light, and the State of Michigan. The feature is known as a self-directed brokerage account.
A self-directed brokerage account allows the participant in a 401k to forgo the limited list of funds available on the 401k platform and instead have their money invested in a brokerage account at companies such as Fidelity or Schwab. Fidelity and Schwab offer thousands of mutual funds available on their brokerage accounts, dramatically improving the options available to the participant. In many cases, participants can also buy individual stocks, bonds, and ETFs in the self-directed account.
Schwab calls their 401k self-directed platform Personal Choice Retirement Account (PCRA), and Fidelity calls their 401k self-directed platform Brokeragelink. In my experience as a retirement planner and investment advisor, very few participants take advantage of these platforms. This is unfortunate because often 401ks have a limited list of funds available, with some asset classes completely missing. To be entirely fair, there are usually a few excellent investment options in each 401k, but in my opinion, to build a truly diversified portfolio with great funds in each asset class, a generic 401k lineup will not suffice.
For those working at an employer that uses Fidelity’s 401k platform, looking into whether Brokeragelink is available would be a worthwhile investment of your time. Unfortunately, many large employers that utilize Fidelity do not have this option available. The retirement plans at Ford, General Motors (RSP), and Eaton do not currently have Brokeragelink. Ideally, these employers add this feature in the future, but for now, participants may want to look at other options if they wish to expand their investment options. For example, at age 59.5, most participants can roll their 401k balance over to an IRA, which will have nearly unlimited investment options.
Just because your 401k may not be through Fidelity or Schwab, it does not mean that you don’t have a self-directed option. The Schwab PCRA platform is available at several employers even when the Schwab 401k platform is not utilized. For example, The Sparrow Hospital Retirement Plan through Transamerica has the PCRA platform. Additionally, The Ascension Genesys Retirement Plan also has the PCRA plan available.
It's important to note that if a participant chooses to utilize a self-directed 401k platform to improve the investment options available, they should feel very comfortable researching and selecting funds. When thousands of funds are available, narrowing that list down and implementing a strategy can be overwhelming. A qualified financial advisor, such as a Certified Financial Planner (CFP) or Chartered Financial Consultant (ChFC), can help with this process. In many cases, an individual investor working by themselves on the 401k investment selection process might be better off not using a self-directed account as the options in the 401k can be sufficient. However, should a participant/investor wish to make sure they are purchasing the absolute best funds and implementing a truly diversified portfolio working with a professional and utilizing the self-directed features is likely the best option.
Written by: Brice Carter
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