A self-directed 401(k) or 403(b) is an additional investment option to the traditional retirement plans offered by your employer. It might be available to you and you don’t even realize it. In those traditional plans, your employer pre-approves funds you can invest in, whereas a self-directed 401(k) or 403(b) allows for a little more flexibility in choosing what you can invest in.
Whether it’s you or someone outside your company’s organization, the option of a self-directed 401(k) could be great for you if you like having a little more say in where your money goes. It’s important to note that not all employers offer this option, so check with your organization to see if you’re able to participate in a self-directed brokerage of your investments.
I can’t tell you how many people I’ve talked to who have no idea how their 401(k) is invested. It’s usually not managed well because they don’t know how to select their investments nor do they have anyone to manage it. In other words, no one is guiding them and their company or organization is just running on autopilot with a pre-approved set of investments.
For a lot of people, this is their largest investment account, so it’s worth it to know what’s happening within that container! Think about it: this is the money that will see you through your retirement, which could last 30+ years. Maybe it isn’t your largest investment right now, but it certainly will be over time.
Your employer decides whether to offer this feature, as well as the types of investments you can choose from. That said, the benefits are the same whether you have complete brokerage control or are only able to invest part of your money as you see fit in order to remain enrolled. Here are just a few of the benefits of a self-directed 401(k) or 403(b) retirement plan.
First, let me say that all contributions you make toward your retirement or any other investment plans are meaningful, so I am certainly not saying that having an employer-directed 401(k) means you’re doing something bad or it’s “less than''. It just means that rather than your investments being selected through your company, you have someone monitoring things on your behalf.
A large benefit of a self-directed 401(k) plan is that you are in the “driver’s seat” so to speak and have more control over where your investments go, so you can make more consistent progress toward your goals.
With a self-directed plan where an investment advisor is monitoring trading and making moves on your behalf, we’re actively trading when we see something drop so your contributions are going farther and you’re benefiting in a meaningful way from those returns.
Related reading: Roth IRA vs 401(k) - What’s the Difference and Why Does it Matter?
Here are a few things that may be going through your head when it comes to suddenly having the option to make your own investment moves:
“Am I making the right choice?”
“I don’t know how to ‘read’ whether something is a good investment.”
“What if I’m working and I miss my window to sell or buy something good?”
Because a self-directed 401(k) has more investment options than an employer-controlled plan (where your options are extremely limited), things can get confusing or even overwhelming.
The good news in all this flexibility is that you can have someone actively involved in your daily investment management when you have a self-directed plan! That means you can work with a financial advisor or planner to make moves on your behalf.
I cannot stress enough how powerful it is to have a dedicated person to talk to who is involved in the day-to-day management of your investments. We have an entire team of people dedicated to just that! They know you and your goals in depth and are on your side working for your benefit 100% of the time.
They also can keep an eye on the trading and are empowered to buy or sell on your behalf, which means your money will grow in relation to your personal goals and risk tolerance so you are in control and feel financially secure and confident.
Related reading: 6 Investor Tips for Handling Wild Market Swings
Hands down, the biggest benefit of having a robust, actively managed retirement account comes down to risk. It can be said that (generally speaking) people tend to be more risk-averse when it comes to their investments. They almost have to be because they’re not intimately acquainted with investment management nor are they actively involved day-to-day.
By having a self-directed 401(k), you have someone actively looking at your portfolio so you can take more risk over time, which can get a better return for your money.
Additionally, when you have an active manager, they're looking at all investment options that are available and how the overall market, economy, and various industries are performing. That means risk management is active.
Because, the reality is, there are alway certain areas of the economy that have greater risk. For example, the energy sector has underperformed the S&P for quite some time. If you look at certain companies that have benefited from the pandemic and people staying home more, their values have become inflated. That increased the risk associated with those investments. An active manager is looking at the values of the industries and minimizing the exposure where there’s greater risk.
Sadly, I have seen many mis-managed portfolios. Because this money is a long-term investment, it can feel “not real” or like it’s play money. I’ve also seen some people who don’t think about their investment options until it’s almost too late, which means that gaining the financial security they need comes with a larger risk (investments that can grow quickly can also lose money quickly).
Related reading: How the CARES Act Could Impact Retirement Savings
At the end of the day, whether you chose to have Great Lakes Investment Management or another firm invest your money in a self-directed brokerage window, I’d implore you to take this investment seriously if you don’t want to work for the rest of your life. Your 401(k) or 403(b) is truly an investment in your future. Like I mentioned, check with your employer to see if a self-directed 401(k) or 403(b) is an option and then contact your financial advisor or planner to begin making wise investments for your retirement.
If you would like to discuss your self-directed brokerage options (or other investment options) with me at Great Lakes Investment Management, we’d love to have you! Click here to schedule a complimentary consultation.