Why 401(k) Plan Sponsors Increasingly Eye Self-Directed Brokerage Accounts

Resulting investments can create potential risks to participants and plan sponsors
self-directed brokerage accounts
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Good or bad, smart or scary, the current environment appears ripe for self-directed brokerage accounts (SDBAs).

Cerulli Associates reports that certain groups of plan participants welcome the opportunity to hold retirement investments that reflect their personal values and priorities. By taking a fresh look at SDBAs as an investment option for their plans, sponsors will be able to harness participant enthusiasm to increase interest and engagement with their retirement plan.

The Boston-based research and consulting firm writes that, in many ways, SDBAs represent the push/pull associated with defined contribution (DC) plans—the goal of a secure retirement for plan participants versus the desire to give participants maximum control over how they achieve that goal.

If plan sponsors want to use SDBAs to increase retirement plan participation and engagement, they may need to make clear the ways in which participants can leverage SDBAs to shape their investment choices.

“Plan participants may see their self-directed brokerage window as an opportunity to gain access to specific types of investments that meet their unique needs and wants or simply to have more investment choice than the plan’s core fund line-up generally offers,” Cerulli Senior Analyst Shawn O’Brien said in a statement. “For instance, participants may want to gain access to socially responsible investments that reflect their values.”

Potential participant risk

Although SDBAs provide retirement plan participants with access to numerous investment options, the resulting investments can also create potential risks to participants and plan sponsors.

“It would be both easy and unsurprising for plan participants to overestimate their investing knowledge,” O’Brien added. “With the freedom to choose from a wide array of investments and execute trades as they see fit, these individuals may end up overtrading or taking on more or less risk than is prudent given their age and circumstances.”

The research pointed to fees as a potential risk as well. While trading fees have declined sharply or disappeared altogether, the investments bought and sold through an SDBA may have their own underlying fees, which may not be as low as the attractive institutional pricing offered by many retirement plans’ core funds.

For these reasons, plan sponsors can place certain guardrails around SDBAs to mitigate some of the risks associated with these accounts. In some cases, plan sponsors place limits on the investments available through the SDBA and what participants can do within their accounts.

With the right approach, however, retirement plan sponsors can maximize the positives and mitigate the negatives, providing an SDBA that gets participants excited about and engaged with their retirement plan.

“The key will be to consider both the potential challenges and rewards involved in offering self-directed brokerage windows,” O’Brien concluded.

John Sullivan
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.

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