As you know, most of our retirement assets are held within some type of employer provided plan, mainly a 401(k). Within these plans, there can be a limited number of investment choices. And sometimes, they are not always the greatest options. It’s like going to a boutique that only carried 2-3 shoe styles. And we know, a woman must have options.
So, have you heard of the self directed 401(k), also called the brokerage option? This may be an alternative that exists within your current plan. A self-directed 401(k) offers the same benefits of pre-tax savings and automated payroll deductions that you’ll find within a traditional 401(k) plan. The difference is in your investment choices.
Rather than choosing 401(k) investments from a short menu of pre-selected mutual funds, participating employees have an entire universe of investments they can consider. This means you can invest in a variety of stocks, bonds, mutual funds, ETFs and other alternative investments, such as institutional style asset management. Just remember, your company can choose to limit access so that retirement investors can’t purchase overly risky investments. Being that for most people it is a major source for funding retirement, you definitely want to proceed with caution.
Another consideration is fees. These are overlooked charges that can reduce your overall portfolio return. These fees can include annual operating costs such as 12-b1 and management fees or there could be transaction charges for stock and ETF purchases. Fees can vary, so evaluate them prior to making your final selections.
To some, the added options may be overwhelming. You can enlist a professional to assist you with an appropriate asset class allocation and selection of the best funds to fit within your risk tolerance and overall investment strategy.
Just remember, your 401(k) is a major retirement saving vehicle for your future. So evaluate your options closely and prudently before finalizing your investment decisions. Just like all shoes are not the best fit with your style and taste, the same applies to investments.