Op-ed: How to Use a Self-Directed Brokerage Account on Your 401 (k) Plan

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Out of sight out of mind. For many people, this is how the 401 (k) plan offered by the employer works.

The employee chooses from a limited range of investment options. As long as the account is showing a general upward trend, the average investor has no reason to question their investment strategy or the management fees associated with the plan.

In fact, studies have shown that the average investor is completely unaware of the fees associated with their 401 (k). TD Ameritrade estimates a meager 27% of attendees understand what they’re paying for.

Whether you are in the middle of your career or nearing retirement age, you want to get the most out of your money. When you pay fees for your 401 (k), they can let those fees work for you too.

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If your employer’s plan allows it – and increasingly – it may be worth hiring your own advisor. That way, you can put yourself in an ideal position to optimize your retirement plan and meet your overall financial goals.

While not every employer offers the option of hiring their own consultant, more and more companies have embraced the trend. In fact, around 40% of all American employers give plan applicants the option of a self-directed brokerage account, which also includes the option of hiring their own advisor.

Hiring a personal advisor has become so popular that 403 (b) plans now offer the option. If you are wondering whether you can also hire an independent consultant, it is best to contact your plan administrator for the full list of options.

Why should I hire a consultant?

More and more 401 (k) plans offer an alternative to the traditional preselected list of investments. This alternative is known as a self-directed brokerage account.

Some SDBAs allow you to hire your own third-party investment advisor – a trustee to work for you rather than the plan that steers your investment strategy according to your needs. The self-directed path gives investors access to a whole new universe of investment opportunities, including mutual funds, exchange-traded funds, and stocks and bonds à la carte.

Given that nearly 40% of the 401 (k) plans now offer an SDBA option, the self-directed option can be expected to see widespread adoption. However, participation remains low as many people are not even familiar with this option or know that they may be able to hire a personal advisor.

If you employ your own consultant, you can expect a consultancy fee. Some plans call for this fee to be debited directly from the subscriber’s 401 (k) account. Typically, an independent consultant charges between 0.5% and 1% of the total managed funds per year.

However, don’t let these consultant fees scare you. In many cases, this price range equals what investors are already paying under a traditionally managed 401 (k). A fee of 1% is the industry average. For smaller accounts, this fee can be up to 2%.

With an SDBA, your fees are likely to be on the lower end of the industry average. In return, you get exponentially increased value from your private advisor. According to several industry studies, a good consultant can offer you more than 3% added value.

When should an independent consultant be hired?

Professionals such as doctors or lawyers may not have the time to adequately manage their 401 (k) portfolios.

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Hiring an independent advisor, while not a one-size-fits-all financial solution, is an advantageous choice for many.

How do you know the SDBA route is right for you?

The value and effectiveness of keeping your own financial advisor depends heavily on your career and income level. In general, the more wealth you have, the smarter it is to hire a professional.

Likewise, professionals with demanding, time-consuming jobs such as doctors or lawyers may not have the time to properly manage their portfolios, nor may they want to leave it to an old advisor as dictated by their employer. Advisors can also be a useful asset for those looking to choose an SDBA but lack the investment expertise to successfully build their portfolio.

To determine if the SDBA route is right for your needs, you need to set your overall financial goals and then assess whether you have the time, resources, energy, and knowledge to manage your assets on your own. If you are missing any of these critical factors but still want to maintain a wider range of options and a greater sense of control, hiring an independent advisor may be the best choice for you.

What benefits can you expect when you choose an SDBA? The answer, for starters, is access to a wider range of investment options.

A traditionally managed 401 (k) plan has limited offerings that are typically found in curated mutual funds. An independent advisor opens the door to all investment vehicles such as ETFs, individual stocks and bonds, and even non-traditional opportunities such as real estate.

Having an advisor individually diversifies your investment options, and given the potentially lower fees associated with an independent advisor, an SDBA gives you more bang for your buck.

As an added benefit, the personalized insight you get from your own advisor will help you better keep track of how high your risk is and how it is changing over time. A personal advisor can give your account the time and attention it needs to thrive and help you meet your long-term financial goals.

The employer-managed 401 (k) is a solid investment vehicle. There is nothing wrong with it, but as your wealth grows it is in your best interest to examine the details of your current investment plan with a critical look at its performance, associated fees, and overall value.

For investors who want tailored investment decisions or more aggressive financial options but don’t have the time and energy to get into the process, hiring an independent advisor is the best possible choice.

– By Renée Pastor, Founder and Asset Manager at The Pastor Financial Group

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