401k programs are notorious for offering very few, yet expensive, options for their clients. However, one loophole may save you thousands of dollars per year and let you have more control over your retirement plan.
The Self-Directed Brokerage Window
A small but growing minority of 401k providers now offer their clients a self-directed brokerage window, allowing them to make trades with their 401k savings and buy funds and stocks not directly offered through the plan. The brokerage window will let you buy any stock, fund, or exchange-traded fund on the open market with your 401k savings at a fixed commission price.
Using the Window
Investors who want to use the window to guide their own financial future should ask their 401k provider if they allow the option. A quarter of 401k providers offer the option for a flat rate annual fee of usually $100 – $200 plus a fixed trading commission to make your own trades.
While the prospect of paying any more to your provider may seem a little ridiculous, a $200 annual charge plus $20-25 per trade is far less than the expense on most mutual funds. In fact, investors with assets of $20,000+ in their 401k should actually save money, all the while increasing the number of options they have to invest.
Making the Most of Your Window
Making the most of the brokerage window requires that investors do as little trading as possible to avoid the high commission cost on individual trades. Remember, unlike online brokerages that charge anywhere from $4 to $10 per trade, your 401k provider likely charges a fee of as much as $35 per trade. When you consider you'll have to make several trades each month, the fees start adding up.
To avoid these high costs, consider moving assets into your own directed portfolio annually or semi-annually, reducing the commission costs while keeping the same diversification. Exchange-traded index funds make this incredibly simple and inexpensive, and they cost just fractions of what the average 401k mutual fund charges.