Semi-amusing observations on 401(k) self directed brokerage accounts

Is it my imagination or does every 401(k) plan that wants to offer a self directed brokerage account option for participants is either a law practice or medical practice?

In 12 years as an ERISA attorney, I cannot recall a client that put in self directed brokerage accounts that wasn’t a law firm or a medical practice.

My second observation is that the participants that go the self directed brokerage route, always do worse than what other participants do under the mutual fund menu set up by the plan’s financial advisor.

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7 Responses to Semi-amusing observations on 401(k) self directed brokerage accounts

  1. Steve Smith says:

    A simple application of the behavioral finance trait called overconfidence; the most difficult one to overcome because it requires us to be skeptical of our abilitites.

  2. Lan Nguyen says:

    The SDBA option is great for the investment savvy, especially in these recent times. It is utilized most by senior level and C-suite execs who have their own financial advisors. My firm is an executive search firm and has this option but I am one of the few who utilized it, and as a result did NOT lose money in my 401(k) but gained very well. Unfortunately, we are in the process of changing plans and the new plan financial advisor is not recommending/including a SDBA option. My new options will be very high cost funds selected by said advisor who stands to make a nice fee! Give me a break.

    • Is there a reason your company can’t offer both? There are plenty of platforms in the market that offer a “fully automated” SBDA. This is important because it simplifies the operational, audit and cost aspects that frequently crop up with SDBAs. My firm acts as a 3(38) investment manager. Perhaps, I should talk to your HR area?

      Brian Roberts, CFA

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  4. Rochelle Silverstrom says:

    Yes, I believe SDBAs are most popular among professional groups such as doctors, lawyers and engineers. However, in my experience, less than 5% of the participants in plans that offer the SDBA option actually select it. Some SDBA platform providers offer SDBA participants the ability to invest their account in various professionally managed accounts. In my experience, about 50% of SDBA participants who have access to managed accounts in their SDBA will take advantage of that. A separately managed account could also be less costly than mutual funds or insurance products. Depending on the platform, an SDBA could provide participants with the best of all worlds: more flexibility, lower cost, and professional money management. Not such a bad thing!

  5. Having one’s own “brokerage” account within a 401(k) plan may sound great. Not “allowing” clients to entertain such, I note it is too “bulky,” is too flexible, allows very little effective investment guidence, can involve too many emotionally encouraged transactions, and has other issues.

    When a firm’s principals can design a 401(k) plan with almost any investment option of their choice, they become more intrigued. REITS, Precious Metal and Gold, Pacific-ex Japan, Europe, Latin America, Emerging Market Bond, Emerging Market Equity, Treasury, Soveriegn Debt, Japan, China-India, 2x “Bull” and “Bear” and other mutual funds can be made avialable on an “open” platform with complete secure internet access are available.

    Plus investment advice, I mean “investment ideas” can be “discussed’ easily between Participants and a fairly knowledgeble investment professional. More effective and efficient 401(k) investment programs are available if one knows how and where to look.

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