Do you ever wish you had more investment options in your 401(k) retirement plan? More than 40% of employers now allow employees to go way beyond the core menu of 401(k) investment options, giving them access to perhaps hundreds or even thousands of mutual funds and exchange-traded funds plus individual stocks, bonds and other securities.
The employees are able to do so through a “brokerage window,” which is, in effect, a self-directed account that you access through a major brokerage such as Fidelity, Charles Schwab or TD Ameritrade. The accounts, which were offered by just 29% of employers in 2011, are growing in popularity but still are used by only 2% to 4% of 401(k) participants, according to a Wall Street Journal survey. (Some 403(b) and 457(b) plans offer the option, too.) Some employers set limits on what percentage of a participant’s investments can be invested through the brokerage window, typically between 75% and 85%. And unlike with a nonretirement account, you cannot “short” (bet against) stocks or use leverage (borrow money from the brokerage to invest).
Drawbacks: To access a brokerage window, you typically pay an annual fee of $25 to $75 in addition to your plan’s annual administrative fees. Employers are not obligated to vet the investments in the brokerage window as they are with core options, although some employers do. Funds in the brokerage window tend to be more expensive because they are investor-share classes, while funds in 401(k) core menus often are institutional-share classes with lower costs. You also may have to pay trading fees when you buy or sell stocks, as well as certain funds, through the brokerage window.