A very nice option: self-directed brokerage in a 401k plan

August 9th, 2009 · No Comments

I’ve recently finished a year-long stint on my employer’s “401k Committee”.   We’d been searching for a new 401k plan provider in order to lower fees paid by both the company and individuals, as well as increase participants investing options.  One thing we quickly learned was that many 401k providers are now offering plans that allow participants to opt out of the administrated, standard mutual-fund plan and fully control their assets using a “self-directed brokerage” option.  This, in effect, gives you IRA-like control over your investments while still staying within the plan.


Purchasing stocks in a 401k: priceless

My employer ended up going with a plan administered by Iron Financial where the assets are invested thru TD Ameritrade.   There are a number of nice things about the IF plan, and one of the most important to us was the transparency provided by having all administration fees shown as expense line items on a quarterly basis so everyone knows exactly what fees they’re paying.  But, in my opinion, the real interesting thing is that employees can individually opt for the self-directed brokerage option which means that they can use the retail TD Ameritrade website to trade any stock, ETF, or fund accessible through TD Ameritrade.  So you know I’m opting for that. Here’s what I’ve discovered about how it works.

The first thing of note is that the annual asset-based administration fee is cut in half, down to 25 basis points (0.25%), for those who choose the self-directed brokerage plan versus the 50 basis points for those using the standard mutual fund plan. The drop is because you’re no longer using IF’s screening process to identify the “best” mutual funds that are part of the plan.

Another important fact is that I’m now paying a $9.99/trade commission for the purchase of stocks and ETFs and $0/trade for NTF mutual funds (those are TD Ameritrade’s standard rates) and I can pick literally any stock, ETF or one of 3,200 NTF mutual funds available at TDA. Whereas if I stayed in the standard plan, I’d pay nothing per trade but I’m limited to choosing from about 12 NTF mutual funds (NTF means no-transacation-fee.) I need to be cognizant of the overhead of trading commissions now – though since we’re paid monthly, the fees aren’t necessarily to bad if you’re careful. For example, so far I’ve been ensuring I purchase in amounts over $1K to keep the commissions down to less than 1%.

The next thing to note is that deposits to your account on each pay date will just sit there until you login and place a trade order. This is because you don’t have anyone looking over your shoulder, having noted your trading preferences, and watching for money to hit the account and distribute it. However, most brokers do offer a scheduled investment plan and TD Ameritrade is no different. The catch here is that if your deposit amount changes, you’ll risk either the scheduled trades not being made (if the deposit amount went down) or not using all the money available (if the deposit amount went up.) Because I’m trying to do some rebalancing by each monthly pay check’s deposit, I’m so far doing all manual trades. This also helps me to pick limit order prices that make more timely sense.

The one thing that I’ve found missing when comparing this type of 401k to an IRA is that the trustees of the plan have to manually approve any options level requests before the brokerage lets you request it from them. My employer has decided that they don’t think employees should be taking options risks on their 401k so they won’t approve any employees ability to trade even covered calls. From what I can tell, almost all self-opened IRA plans would allow such a conservative use of options. And some, such as ThinkOrSwim, would allow any type of options as long as the trade has defined risk.

While it’s only been a few months that we’ve had this plan, I’ve got to say that I’m thrilled with the universe of investing options I now have.

Tags: 401k · Brokerage · Investing

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