Company retirement plans are legendary for their limited menu of boring mutual fund options. But the statistics say that more and more company retirement plans are adding a key account option known as a “self-directed brokerage window.”
In 2005, about 15% of company retirement plan offered a self-directed brokerage account option. At of the end of 2013, that number had increased to over 40%.
A self-directed brokerage account (SDBA) provides access to a standard brokerage account within your existing company 401(k) retirement plan. The same SDBA account option can be found in an increasing number of 403(b) and 457(b) company retirement plan menus.
The SDBA account allows individual company retirement plan participants to invest in an expanded menu of mutual funds. Some SDBA accounts allow for the ownership of individual stocks and exchanged-traded funds (ETF’s).
Here come the disclaimers…
There may be annual fees associated with your SDBA account. These annual fees range from $25 to $100 per year.
There are also transaction costs to buy or sell stocks, mutual funds or ETF’s. I have seen transaction fees as low as $5 and as high as $65 per transaction.
Before you get turned off by the additional costs of an SDBA option, let’s do some quick math involving the annual costs that you pay now to own your company retirement plan mutual funds.
The average annual fee of most default company retirement plan mutual funds is about 1%. Let’s assume that you participant in a very generous company retirement plan. So, your annual mutual fund fees are a very low .5% annually.
If you had $50,000 invested in a default mutual fund option in 2014, your annual cost to remain fully invested in that mutual fund was approximately $250.
That same dollar amount invested in an index ETF last year would have cost you about .1%, or about $50. Let’s say that you had to pay $50 to open the SDBA account, and another $50 to buy the ETF. You still would have been $100 ahead with this example.
Most company retirement plan includes a few low-cost broad market index funds. But there is very little chance that you are currently 100% invested in low cost index mutual funds now. It is much more likely you currently own a handful of high-cost and poor-performing mutual funds.
Change things up in your company 401(k) retirement plan account in 2015. Take a look at your annual mutual fund costs. Next, look at your 2014 investment performance.
You can lower your annual fees and have the opportunity to improve your investment performance with the SDBA option in your company retirement plan account.
Ric Lager
Lager & Company, Inc.
