401(k) plans can feel a bit restrictive if you have little investment experience. Since they must be offered by an employer, you are limited to investing in a plan that contains relatively few options compared to the almost unlimited choices of an Individual Retirement Account (IRA) or a traditional brokerage account.
Instead of thousands of options, you may have around 20 choices, and there may be associated fees with these options that are quite high.
As investor awareness of investment fees increases, some employers are now offering 401(k) accounts with a brokerage window. A brokerage window allows you to take advantage of many other investment options outside of the standard 401(k). Yes, that includes stocks, exchange-traded funds (ETFs), bonds, and even some low-risk trading.
How does it work?
The reason it’s called a brokerage window is that it resembles an open enrollment period where you can sign up for and change employee benefits, as the window only opens at certain times of the year.
Most plans also define an “all or nothing” approach; you either invest everything in this brokerage window or not at all. You cannot do half and half or some other ratio. Once you move to this type of account, you can treat your account just like an IRA.
Benefits
Have you taken a good look at the options available to you in the 401(k) plan offered by your company? Unless you work for a huge company, it’s likely that the options are less than ideal.
Note: Large companies may, due to their size, get better and more cost-efficient options than small companies, but even large companies may restrict you to just a few funds.
What if you don’t want to invest in mutual funds? What if you want to invest in specific sectors, specific companies, or you love ETFs that focus on certain areas of the economy? You might not find that in your 401(k) options.
You’re also more able to allocate funds precisely within your overall investment portfolio. If you have a successful investment portfolio outside of your 401(k), you might find it hard to balance the two since your 401(k) funds are invested in very broad categories. How can you allocate funds to a specific sector when your 401(k) is simply invested in hundreds of large-cap stocks?
If you take advantage of the brokerage window, you can allocate your funds the way you want.
Drawbacks
With the freedom that comes with a brokerage window also comes more risk. One reason your employer offers you fewer options is that studies have shown that more options do not lead to better decisions. Even professional investors do not have a remarkable track record of bigger gains when given more options.
A downside of the brokerage window is that you may find yourself in investment products you don’t understand or taking on a level of risk that most investors do not comprehend. Do you have enough time to continuously research the latest geopolitical news and how that might impact your oil stocks? What about Federal Reserve policy? Are you clear on how the Fed will affect your bond portfolio? You have a job and a family and likely don’t have time for that level of research.
There are also fees. Do you remember how we mentioned that some of those options in your 401(k) come with high fees? Less experienced stock traders often trade their stock portfolios excessively. Every move comes with a fee, and those fees can add up quickly.
Best
Option
There is no one-size-fits-all advice, but generally, for individuals looking to take advantage of a brokerage window, do so only if you have a strong history of creating successful investment portfolios or if you have a trusted financial advisor to assist you. Do not use your retirement funds to learn how to invest. Protect your future by keeping your retirement money in the hands of professionals or within the confines of your 401(k). If you want to learn how to invest, start with an account that uses virtual money. You can find these demo accounts for free online. Once you show strong gains for a year or more, upgrade to a small account that uses real money and grow from there.
Leave your retirement money to a professional and make sure they know if you have a brokerage window open to you.
Source: https://www.thebalancemoney.com/401k-plans-with-a-brokerage-window-4585206
Leave a Reply