For many of us, the experience of signing up for our 401(k) is a bit like ordering off the lunch menu at a Chinese restaurant. You’re handed a set menu with very little choice; sometimes the offerings are appealing, sometimes they’re not, and sometimes you’re not even sure what it is you’re looking at. But what’s really frustrating is that you know there’s something better cooking in the kitchen
When it comes to 401(k)s, the good news is that many employers have responded to consumer frustration through the addition of a self-directed option. Sometimes referred to as a brokerage or mutual fund window, self-directed accounts allow you to buy any mutual or exchanged-traded fund (ETF), and sometimes even individual stocks and bonds, that catch your fancy.
Self-directed funds allow you to go “off menu” and pursue investments that are in line with your strategy. From targeting select asset classes or sectors to keeping internal plan costs low, self-directed funds fill the bill in the way tradition 401(k) accounts don’t.
However, not everyone agrees that more choice is, shall we say, “more” better. The truth is, the less-than-savvy investor can do more harm than good to themselves by buying stocks that go way down or bankrupt. Or, in their enthusiasm for choice, investors may end up trading so much that the commissions charged outweigh any gains. Just like at a restaurant, it’s really only worth going off-menu if you fully understand what you’re getting.
Some employers, including local companies, have found a way to open up the buffet while also limiting potential harm. Glens Falls Hospital, for example, allows employees to put money into a self-directed account but limits them to just mutual funds. While this may sound limiting at first blush, the truth is the option increases the pool of investment choices from a mere 25 or so to a massive 2,000 or more.
In another protective approach, New York state employees who participate in the Deferred Compensation 457 Plan can put money into a self-directed account and invest in both funds and low-cost ETF’s. But in this plan the state caps self-directed investments to 50 percent of the total account balance. That way if an employee makes a bad investment choice, they might feel sick but they won’t be sunk.
Interestingly, many 401(k)-plan participants aren’t aware of self-directed options even when they’re offered where they work. I attribute that to the fact that most of us have gotten used to the limited menu approach. Let me be the first to encourage you to order off the menu. Don’t just take what’s handed to you. Ask your employer to explain all your options and if they’re not to your liking, ask for what you want. There’s a good chance that expanding your investment options is as easy as duck soup. And if you have trouble reading the menu, reach out to a professional who can translate.
Jason MacGregor, principal of Minich MacGregor Wealth Management in Saratoga Springs, is a fee-only advisor who provides investment advice to individual company retirement plan participants. He can be reached at 499-4565, jason@mm wealth.com, or Twitter @mmwealth.
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