401(k): Are Self-Directed Brokerage Accounts a good idea?

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fcirullo
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401(k): Are Self-Directed Brokerage Accounts a good idea?

Post by fcirullo »

What's your opinion on Self-Directed Brokerage Accounts within a 401(k) plan? Are they a good idea or a bad idea?
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Skinut
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by Skinut »

Good idea for bogleheads and people who know what they are doing. Bad idea for people who try to beat the market by picking individual stocks or leveraged ETFs.
dbr
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by dbr »

Skinut wrote:Good idea for bogleheads and people who know what they are doing. Bad idea for people who try to beat the market by picking individual stocks or leveraged ETFs.
I can't comment on people for whom these are a bad idea.

I can say that for me, and people like me, the directed brokerage is a tremendously good idea. If my plan didn't have the option my 401K would probably have long since been rolled into an IRA. I, by the way, have a pretty good, extremely low cost, 401k with a good stable value fund. The weakness in the plan for me is fund selection.
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mhc
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by mhc »

Good idea especially for plans that do not have sufficient low-cost index funds.

Of course good ideas can go wrong.
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fcirullo
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by fcirullo »

The wiki article, Setting up a 401(k) plan , now has a link to this thread. You can find the link under Under Forum Discussions.

Note: The idea of the wiki article is to show employers how to set up, manage, and monitor a truly low cost 401(k) plan. But the idea is also to show employees what a low cost plan really looks like so that they can communicate to their employer ideas on how to improve their current 401(k) plan. Your input Is Greatly Appreciated!
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by livesoft »

I suppose the 401(k) plan should be so good that a self-directed brokerage option is totally unneeded.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by MnD »

Good for avoiding high cost fund options and/or for "fill-in" for things that might not have fund options like EM, small value, small cap international......
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by Watty »

fcirullo wrote:What's your opinion on Self-Directed Brokerage Accounts within a 401(k) plan? Are they a good idea or a bad idea?
They are overkill which some people will get into trouble with. They may also be likely to cause employees to spend too much work time talking about and fiddling with the brokerage account during the day since most trades will be done during the work day.

A half a dozen great low cost index funds and a range of target dated retirement funds is plenty.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by BillyG »

I think they're a great idea now -- but earlier in my investment "career" it was a bit dangerous.

More detailed considerations are below.

The brokerage option is important to some employees, and it also may be important to the employer in terms of fees they pay. When the employer sets up the brokerage option they or the 401(k) fund company may set a limit as to what percentage of an employee's 401(k) savings may be invested through the brokerage option and what percentage must stay in Plan funds. Also, the employer will need to decide on any fees payable through using the brokerage option. In one of my 401(k)s I learned that a maximum of 95% of my 401(k) money could be invested through the brokerage option while 5% must stay in Plan funds. I didn't see this limitation anywhere in the Prospectus or disclosures.

These "additional" fund fees go to pay 401(k) expenses for the Plan. If the funds offered through a brokerage option are available with no surcharge then they don't generate the fees to pay for the 401(k). Thus some 401(k) plans limit the percentage of an employee's 401(k) assets that can be invested through their brokerage option.

As I mentioned above, I found this out when I tried to implement my investment plan and learned I must keep 5% of my 401(k) assets in Plan funds. Although it's pretty great to be able to invest 95% of my 401(k) assets through a brokerage option to access funds I want at lower fees, I might have tailored my investment plan a little differently to account for this limitation.

Bogleheads are well aware that 401(k) Plan funds may have fees that are higher than fees on the same funds purchased directly from the mutual fund company. In some cases the fees are lower such as when a Plan Participant can access Admiral share offerings for small balances, although they generally have higher fees than Admiral shares purchased outside the 401(k).

For the employee, it is important to consider not only the fees on the funds themselves, but any fees on buying/selling/rebalancing the desired funds in the brokerage account. Often there are no transaction fees when buying funds in the fund company administering the 401(k). For example, a 401(k) managed by Fidelity may offer Vanguard funds, but if the fees are unreasonably high or the particular Vanguard fund you desire is not available in the 401(k), you often can buy the desired Vanguard fund through the brokerage account and pay a transaction fee (because Fidelity is running the 401(k)) OR buy the equivalent Fidelity Spartan fund through the brokerage option with no transaction fee, which may be a good alternative. Equivalent funds in Vanguard and Fidelity are discussed in the Wiki at http://www.bogleheads.org/wiki/Fidelity and this article contains link to Schwab and other fund families as well.

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Last edited by BillyG on Tue Mar 05, 2013 12:45 pm, edited 1 time in total.
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ruralavalon
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by ruralavalon »

A good idea. The transaction fee needs to be reasonable. In my plan it was originally zero, later changed to $25 per trade.

Its probably more important to have good low cost fund choices in the plan itself, so that most people don't feel a need to try to avoid the choices offered in the plan.

My plan had a brokerage option which I originally used for purchase of treasury bonds (I didn't use any bond fund), and later used to switch out of the higher cost off-brand S&P 500 index fund offered in the plan into the low cost Vanguard S&P 500 fund.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by KyleAAA »

Bad idea in general. Like any tool, it can be used for good or for evil. But since 90% of people are probably going to use it for evil, the 10% of us Bogleheads are just going to have to suck it up and invest in crappy 401k funds, for the good of humanity.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by MnD »

I use the brokerage option for four ETF's (core and fill-in) and trade (add to) about four times a year which adds 3 basis points to account costs.
The ETF's weighted average is .20 ER, so figure .23 ER including trades. I could trade a sub-set of ETF's for "free", but three of the four ETF's I prefer for low cost and composition aren't commission free.

in contrast the 401-K fund options have an ER range of .50 to 1.01, with an average of over .75 if I constructed a portfolio just using the standard fund options.
So similar to credit cards, some people are going to not be able to handle a brokerage account. But if you have a modicum of self-control it can yield quite a decent benefit in terms of costs and in getting the exact positions you are interested in.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by pingo »

Watty wrote:They may also be likely to cause employees to spend too much work time talking about and fiddling with the brokerage account during the day since most trades will be done during the work day.
I've being thinking about this very issue. I haven't opened an SDB, but I'm tempted to use it in order to lower my plan costs while increasing diversification. The problem? I have to use ETFs for the most part. (Ugh.) I don't want to have to access such account from work where the network does not appear to be very secure. I'm not sure I won't be on the losing end of transaction. (That's a double-negative, literally and figuratively.) I'm not yet sure it is worth the hassle for me, as badly as I want to expand my investment options.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by madbrain »

For me it is great, I was able to buy Vanguard Emerging Market ETF in my 401k over a year ago, since my plan doesn't have an emerging market fund option.

That purchase is the only trade I have placed so far. It could be many years before I make another trade.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by DaleMaley »

At my Fortune 50 company, there is a small annual fee to use the self-directed brokerage account.

Employees can only buy mutual funds, individual stock purchases are prohibited.

I used it to get access to Vanguard Index funds.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by sschullo »

Its a great idea BUT it depends on the cost. Years ago, I could have invested by 403b directly in Vanguard via my pension plan using my school district payroll deduction, but the cost was prohibitive, $25 per transaction!
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by Angst »

Skinut wrote:Good idea for bogleheads and people who know what they are doing. Bad idea for people who try to beat the market by picking individual stocks or leveraged ETFs.
+1

So maybe plan mgmt. should intentionally make it difficult to find out the option even exists, and complicated to sign up for? There are a lot of people who are their own worst enemy when it comes to investing and I see nothing wrong with trying to protect them from themselves. Do the plan managers at the place of employment not have some sort of fiduciary responsibility that might relate to this? In our plan, I discovered after a lot of searching and eventual phone calls that at 59 1/2 years of age I can begin doing in-service withdrawals (to do partial conversions to Roth IRA, gain self-directed opportunities, etc.). It's not mentioned anywhere whatsoever on the plan website, but perhaps that's a good thing, and perhaps it's intentional.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by tim1999 »

I think it's a good idea for the Boglehead type who otherwise has crappy 401k investment choices, HOWEVER, it depends on the fees. When they rolled this option out in my 401k, the per-transaction fees were crazy-high. So I didn't bother. Yes, I could have managed the self-directed account to buy shares, say, once per month instead of weekly so as to cut down the fees, but it just seemed like more trouble than it was worth.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by Ice-9 »

They're great. At least my BrokerageLink account within my Fidelity 401 is great. On it's own, my plan offered index funds for S&P 500, Mid/Small Index, International, and Total Bond Market. The BrokerageLink account allowed me to add Emerging Markets Index and some individual TIPS (before their yields made I-Bonds a better deal).
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by locke1141 »

Whether it's a good idea or not depends on whether you think preventing a few people from "harming" themselves through excessive trading is more important than allowing others to benefit from broader fund choices.

I participate in my company's. Cost is $50 annually for the account and $29 per mutual fund buy. I trade once a year to buy a Vanguard Target Retirement fund. I contribute the max, so I figure it's a small price overall to pay for exactly what I want. Honestly, our 401k options are decent, I just like my Vanguard fund better.

But, it's easy to bleed yourself dry with the transaction fees without thinking. For people contributing 6% to get a 3% employer match, at $50k salary, that's $375/month total 401k contributions. A monthly trade plus account maintenance costs you almost 9% of your contribution alone ($33 total fees / $375 contribution). On the other hand, a single annual trade on max 401k contributions is about 0.4% ($79 fees /$17500 contributions (not including employer money)).

Our company has been really proactive with 401k education tools, especially fees, so if anyone is harming themselves through the brokerage, I see it as being by choice and not ignorance.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by Angst »

locke1141 wrote:Whether it's a good idea or not depends on whether you think preventing a few people from "harming" themselves through excessive trading is more important than allowing others to benefit from broader fund choices.
I don't believe these things are mutually exclusive.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by locke1141 »

Angst wrote:
I don't believe these things are mutually exclusive.
If there was a way to restrict the trading frequency, have lower fees, etc., you could limit the potential for self-harm, agreed.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by Hub »

I couldn't be happier with my Schwab "PCRA." Without it my 401k options through the work plan would make me sad.

Sure, it would be more ideal for my 401k to actually have good fund options, but that is not the case.
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Re: 401(k): Are Self-Directed Brokerage Accounts a good idea

Post by grakster »

Skinut wrote:Good idea for bogleheads and people who know what they are doing. Bad idea for people who try to beat the market by picking individual stocks or leveraged ETFs.
+1

I recently opened a Fidelity Brokerage Link account for some of my 401k money through my employer plan - but only because of what I've learned on this site. It allows me to get into lower cost funds and diversify into some areas that my plan options either don't have or for which only poor choices are available. It allows me to actually implement a much better portfolio than I otherwise could.

Interestingly, my employer has stipulated that only mutual funds in the Fidelity no-transaction-fee network can be purchased through the Brokerage Link account - providing some protection against those who would time the market with stocks, options, or leveraged ETFs. Still, since the average mutual fund investor under-performs the market, there's still some room for non-Bogleheads to hurt themselves.
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