While most 401(k) investors simply set it and forget it when it comes to their retirement savings, there are some who take the extra step of choosing their own investments. They participate in what’s known as a self-directed brokerage account, which is part of their employer-sponsored plan. These brokerage windows offer a wider selection of mutual funds to employees, as well as individual stocks. Not all plans offer the option and even when they do, not many participate. For instance, 21.5% of Fidelity’s 401(k) plans provide the brokerage window, yet only 3.3% of those with access are investing within it. Schwab breaks it down to about 5% to 10% participation in the windows across the industry. Those who do invest 401(k) money in a brokerage window are typically older employees who have a slightly higher salary than their coworkers, said Mike Shamrell, vice president of thought leadership at Fidelity. They’ve also been described as more “sophisticated” participants, with higher compensated employees gravitating toward the offerings. Participants making more than $250,000 a year have a 10% participation rate in these brokerage windows, according to Fidelity. Many also have a financial advisor who helps them manage their investments. About half of Gen X employees who have a Schwab Personal Choice Retirement Account also have a financial advisor, said Nathan Voris, director of investments, insights and consultant services at Schwab Retirement Plan Services. “Another reason is that folks that are just a little bit more engaged and want to take a little bit more ownership of their investments,” he said. The average balance in Schwab’s self-directed brokerage account was $283,485 in the second quarter, down by 18.58% from a year ago and down 14.62% from the first quarter. However, that doesn’t necessarily represent the overall 401(k) account balance for a saver, since participants can put just a portion of their contributions into a brokerage window. Trading volumes were also lower at an average 11.2 trades per account versus 13.7 in the first quarter. So where are those who are taking advantage of the window putting their money to work? Fidelity and Vanguard don’t break it down. However, individual stocks made up the largest holding of Schwab’s account participants, at 33.23% of their assets in the second quarter. Mutual funds were the second largest holding, at 28.77% and exchange-traded funds were 20.9%. Cash and equivalents were at 15.18% and fixed income was 1.9% Apple was the top stock holding. The top mutual fund holding was the Schwab S & P 500 Index Fund , followed by the Schwab Total Stock Market Index . The top two ETFs were Vanguard Total Stock Market Index Fund and the SPDR S & P 500 . Gaining steam There has been a trend towards more employers adding brokerage windows into their plans. Fidelity has seen about a 5% increase in offerings in 401(k)s and 403(b)s since 2017, Shamrell said. Yet, the participation rate has remained flat, at around 3%. Jania Stout, senior vice president of retirement and wealth at Atlanta-based OneDigital, has also noticed an uptick in interest from employers. Younger workers, who came into investing during the pandemic, have started asking for the option in their plans, she said. “People seem to be a little more tolerant of risk and so they might want to invest in riskier assets, more international investment options, more small-cap, mid-cap [stocks] than you are generally seeing in a 401(k) lineup,” Stout said. In particular, she’s seeing a lot of interest from employers in giving access to funds that incorporate environmental, social and governance themes and, from time to time, crypto. Again, it’s because younger workers want those options, she said. Another reason to add ESG into a brokerage window is because current policy, from the Trump administration, restricts the offerings in 401(k) plans, said Bonnie Treichel, chief solutions officer at Endeavor Retirement. By putting these in self-directed brokerage accounts, employers can avoid them in their core menus and still offer the investment to employees. “The brokerage windows are going to be added more frequently,” she said. “It creates a risk that you can have less sophisticated participants using the brokerage window now more than ever.” What to know If you want to take advantage of a brokerage window, the first thing you should do is check to see if your employer even offers the option, said Fidelity’s Shamrell. It’s also important to remember that the investments are part of your retirement plan. “We continue to encourage people to take that long-term approach and not see it as an active trading platform,” Shamrell said. Also understand what fees are involved and how much you want in the self-directed brokerage portion of your retirement plan. Employers often add guardrails around the accounts, like limiting the percentage of your plan assets in the window, Treichel said. Lastly, seek advice from an expert before you invest, Stout advised. “I do not recommend that you enter on your own without some kind of guidance or advice from a financial professional, unless you are dedicating hours a week to study and research and doing modeling,” she said. “Most employees don’t have that kind of time or focus.”
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