Labor Department Reviewing 401k Brokerage Windows

by | Feb 5, 2014 | Podcasts, Retirement Planning

In this week’s Mullooly Asset Management podcast, Tom and Brendan discuss the brokerage window option that some investors have in their 401k plans at work.

Haven’t heard of a brokerage window before? How about a self-directed brokerage option? The two terms refer to the same option within 401k plans that, until about ten years ago, didn’t exist. The self-directed option has been growing since then, now being offered in around 17% of 401k plans.

401k brokerage windows were created as a result of a series of events that occurred throughout the last few decades. In the 1990s and early 2000s, employers were being sued for not offering employees sufficient options in their 401k plans. This was limiting employees’ ability to diversify their account. As a result of these lawsuits many 401k plans grew from offering 10-15 mutual funds to 50+ in some instances. The problem with that was the high administrative fees employers had to pay. They had to pay up to offer more options to their employees.
401k brokerage window options present opportunity for growth, but also add risk for investors.
So the solution to this mess? Employers have begun to scale back the options offered in their 401k plan again. However, now they’re offering the self-directed brokerage option. Discount brokerage firms (like TD Ameritrade, Charles Schwab, and Fidelity to name a few) offer participants the 401k brokerage window option. It allows investors to open a brokerage account within their 401k plan. By doing this participants are given exposure to a plethora of investment options they originally wouldn’t have had through their plan. We’re talking thousands of mutual funds and almost all ETFs here. With these added options comes the potential for growth, but also an increased risk (like with any investment).

So what’s the Labor Department looking into? They want to make sure that investors are protected with these 401k brokerage windows. They’re worried plan participants may not realize the amount of risk they’re taking on. A question that has come up is “whether a registered investment adviser has to be hired to help participants”, which is something we do every day here at Mullooly Asset Management. We help individuals manage the options they have in their 401k plan at work. Self-directed brokerage options are a great way for somebody, with otherwise limited investment choices within their plan, to build a retirement portfolio that will work for them. Participants should know the risk involved though, and hopefully choose to work with a good investment advisor who can help them accomplish their goals.

401k brokerage window options are definitely something we will be hearing more about in the future. Another article concerning the Labor Department’s review of the self-directed brokerage option (that you can read here) reported that the department is now allowing people to comment and submit questions on the topic. In April of this year they will report their own findings on this topic, which is news we will certainly be monitoring.

In the meantime you can tune into this week’s Mullooly Asset Management podcast to learn more about 401k brokerage windows.

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