I have provided investment advice to self-directed 401(k) investors since July 1999. Most 401(k) participants do not know about self-directed 401(k) accounts. That fact has always been a mystery to me.
Most individual investors have a traditional view of their company 401(k). They are aware of their default menu of 401(k) mutual funds. These mutual funds include stocks, bonds, and a money market account.
The 401(k) provider chooses the default company 401(k) mutual funds. There is some input from the 401(k) administrator. The biggest names are Fidelity, Schwab, Vanguard, and Empower.
More company 401(k) plans are offering an SDBA option. SDBA is an acronym for self-directed brokerage account. These self-directed accounts expand 401(k) investment options.
SDBA’s can use the same company 401(k) sponsor. Or another third-party brokerage account provider. Again, the biggest names in this space are Fidelity and Schwab.
Self-directed brokerage accounts are still employer-sponsored 401(k) plans. Investors who take advantage of the SDBA option have two company 401(k) plan accounts. One on the default mutual fund menu. One in the self-directed brokerage account.
To open an SDBA account, you journal money from your existing 401(k) account to the money market account of the SDBA. From there, you can buy any listed stock, bond, mutual fund, or exchanged traded fund.
Self-directed brokerage accounts offer better-performing investment options. They also provide lower-cost investment options. Company 401(k) sponsors and providers would argue this point. Any or all can contact me during normal business hours for the free education.
Better performance. Lower costs. More diversification. The ability to set “stop loss” levels on 401(k) investments. There is a lot to like about self-directed brokerage accounts in a 401(k).
Self-directed retirement plans enable investors to include alternative assets within their 401(k). Real estate, precious metals, commodities, and even third-party money managers.
Do not forget about the Roth 401(k) option. If your company offers an SDBA 401(k) option, the Roth 401(k) option is most likely available.
Ric Lager
Lager & Company, Inc.
