Don’t Like Your Company 401(k) Options? Open a Self-Directed Account

One of the concerns you should have as you invest in your retirement is whether or not the options offered by your employer are in accordance with what you want to out of retirement later.

Unfortunately, just putting money in your 401(k) doesn’t automatically ensure a successful retirement. In fact, the options that you have for your 401(k) might not be what you need to improve your situation and help you reach your retirement goals. Many employers have default options that are heavy on company stock, or on high-cost funds.

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Take a look at your options; if what your employer offers is inadequate, consider opening a self-directed retirement account.

What is a Self-Directed Retirement Account?

company 401k versus self directed investingA self-directed account is usually an IRA that is handled by a custodian. (It’s also possible, if you qualify, to open a self-directed Solo 401(k)). Even though you direct your asset allocation within the plan, you still need to have a qualified custodian run the plan for you.

With a self-directed account, you can choose what you invest in. As long as the IRS approves of the investments you include, and your custodian is willing to handle it, it can go in your self-directed retirement account.

Benefits of a Self-Directed Retirement Account

Daniel Sentell is with Broad Financial, and he offers some insights into how a self-directed retirement account can help you. First of all, a self-directed retirement account provides you with full asset choice. “No need to ride the stock market roller coaster,” he says. “Popular investments include local real estate and niche businesses.” If you want to take an alternative direction and reap the benefits of a tax-advantaged account, you can use use a self-directed account to your advantage.

On top of that, Sentell says that many self-directed accounts come with lower fee than brokerage-based retirement plans. Fees represent a huge drain on your wealth. Higher investment fees erode your real returns. If you can set up a self-directed retirement account with lower fees, more of your money is put to work on your behalf. You will always have to pay fees, but you can reduce their impact.

Finally, Sentell points out that there is a great deal of personal involvement with self-directed plans. This can “insure profitability and asset attention.” With a self-directed plan, you have to pay better attention to what’s going on with your investments. Additionally, these plans allow you to focus on assets that you are familiar with, and that make sense to you. If you have a familiarity with certain assets, you can include them in your retirement plan, enjoy a tax advantage, and potentially enjoy better returns.

Remember, though, that there are risks involved with self-directed plans. If you add assets that come with higher risks, you will end up with a greater risk of loss. Many investors who choose self-directed accounts do so in order to break outside the equity and bond funds seen in most employer plans and conventional plans. If you go this route, you need to be prepared for the consequences.

Last Edited: 23rd May 2013

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    Share Your Thoughts:

  1. says

    A few thoughts:

    First some 401(k) plans offer a brokerage window within the plan where participants can generally invest in most anything they want. For example a client whose plan is administered by Fidelity offers this option which has some 5,000 choices available.

    I would be hesitant to tell anyone whose plan offers a match not to at least contribute enough to earn the full match. This is free money.

    401(k) deferrals via payroll deduction are painless, before someone forgoes contributing they need to make sure they have the discipline to contribute elsewhere.

    The main component in retirement savings success has been shown to the amount saved which is far more important than the quality of the invest options offered.

    Contribution limits for a 401(k) are much higher than for an IRA.

    I’ve seen some pretty awful 401(k) plans over the course of my career. I would caution anyone to think hard before they completely opt out though. Even with the worst plans there are often a couple decent options that can be over weighted and then the participant can round out their overall allocation with outside investments.

  2. says

    Good post. I think for many they prefer the set it and forget it mentality of the 401k and do not consider opening an IRA. Like Roger though, I would hesitate against telling people to not at least get the match, if offered. Most plans, even if bad, will offer at least a few good Large Cap funds that might be good choices. Additionally, just by opening a self-directed IRA’s does not mean you’ll be free of fees. There are still brokerages out there that do charge needless fees that can eat away at your portfolio.

  3. Bob Braxton says

    Fortunately my employer non-profit offered two good families and I used both 50-50: TIAA-CREF and the other starts with “V”

  4. says

    When I first read about self directed 401k’s, I was very intrigued. However the rules of our employer 401k are old-fashioned and I doubt I would be successful at getting them to let me start one. However it is interesting to know it exists as an option. You could really ramp up the savings if you were looking to maximize!

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