Self directed brokerage account

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A Self directed brokerage account (SDBA) is an option found in some qualified retirement plans such as a 401(k) that allow the participant to invest in a wider selection of investments than is provided within the plan. A SDBA is a sub-account of the qualified retirement plan and money (not investments) can be moved between the SDBA and the qualified plan fund choices. The SDBA may allow the participant to purchase mutual funds without an additional brokerage account, or a brokerage account can be opened and tied to the SDBA for purchasing stocks, bonds and ETFs. ERISA regulations disallow investments in certain types of assets (i.e. company stock, commodities, futures, real estate).

This type of account is also sometimes called:

  • Self Directed Brokerage Account
  • Self Directed Account
  • Individually Directed Account

Benefits

The primary benefit of a SDBA is that it allows the participant to invest in a wider selection of assets than what is available in the qualified retirement plan. Common reasons for utilizing a SDBA are:

  • choosing lower cost funds/ETFs (ER)
  • investing in asset classes not available in the qualified plan (e.g. international small or value)
  • choosing passive funds/ETFs
  • choosing a higher quality bond fund

Disadvantages

Costs

SDBAs typically have additional costs on top of fees charged for the qualified retirement plan account:

  • Yearly custodial fees (sometimes charged as percent of AUM)
  • Yearly account fees
  • Transaction fees (moving assets between qualified plan funds and SDBA funds/brokerage account)
  • Trading fees (brokerage fees)
  • Setup fees (per fund)

The participant should calculate the expected cost of utilizing a SDBA taking into account all fees that would apply and compare it to the cost of using the fund choices in the qualified plan in order to help guide the decision to open a SDBA. Even when utilizing a lower cost mutual fund or ETF, the additional SDBA fees may require larger investment amounts to become cost effective.

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