Have you ever sat down in front of Netflix (ticker: NFLX), Prime Video or Disney+ and ended up surfing for 45 minutes while trying to decide what to watch? Then you just click on something to end your indecision. Maybe you'll land on a good show. Maybe not.
Investing can be a bit like that sometimes. Take your 401(k), for instance. It may have a "brokerage window," "brokerage option" or "self-directed 401(k)" option that allows you to buy a much broader range of investments than traditional 401(k) options that are often heavy on seemingly dull target-date funds.
The 401(k) brokerage account option can be tantalizing. For some, it may even be a good choice. But for most of us, all those decisions can end up being a detriment. You have to be careful, given that this is your nest egg.
What Is a 401(k) Brokerage Account?
"The 401(k) brokerage option lets you treat your 401(k) like a typical brokerage account, which provides access to a much wider variety of investment options," says Wade Pfau, professor of retirement income at The American College of Financial Services. "Traditional 401(k) places typically only offer a limited selection of mutual fund choices."
Another common error, he says, is applying the IRS required limits on contributions. “Sponsors need to know those limits, particularly as they change annually,” Joffe says
These self-directed brokerage accounts permit plan participants to invest in publicly traded securities that aren't offered within the traditional investment menu provided by the plan sponsor, says Matthew Compton, director of retirement services with Brio Benefit Consulting.
"It is the individual's responsibility to ensure the investments they select are suitable for their financial situation including goals, time horizon and risk tolerance," says Brandon Tucker, manager of financial planning with eMoney Advisor.
And therein lies the double-edged sword that is the 401(k) brokerage option. "They can unlock interesting investment opportunities, but also come with heightened risk for investors," says Gaurav Sharma, CEO with Capitalize.
Potential Benefits of 401(k) Brokerage Accounts
There's a reason investors may choose a 401(k) brokerage account. Several, actually: