For many Americans, a large part of your retirement net worth is contained within your company 401(k) plan. Employer’s encourage this type of saving by not only giving you an easy payroll deduction option, so your savings is automatic, but they also provide you with a match, up to a certain percentage and occasionally will even make profit sharing contributions to that plan. Additionally, they have the fiduciary responsibility to select the investment options available to you within their plan. Many times those options are basic index funds or other mutual funds that have passed a screening process that they and their investment counsel have selected. This works well for the many participants but as investment knowledge, in general, has increased and the demand for customization has become more popular, plan sponsors have started to roll out something called a self-directed brokerage option within their plan.
What is a 401(k) Self-directed Brokerage Option?
For the right investor or those that have the professional help of an advisor, this could lead to improved results and increased customizations for a participant within their retirement plan. A typical 401(k) might include 20 different mutual funds and a suite of target date funds (e.g. mutual funds with a year on the end of their name – designed to do it for you based on your estimated date of retirement). With a self-directed option, the investment universe, with perhaps some employer restrictions still incorporated, will now become vastly larger.
Take for example, an employer within our local community; Goodyear. Their plan has a few index fund options along with a target date suite and so for the novice investor this more than likely works out well. However, they also have a self-directed option through Charles Schwab. This means any mutual fund that is open and available through Charles Schwab, the Goodyear employee would have access to invest in, while still “inside” of the Goodyear 401(k) plan. This allows those employees to now pursue investment options, that perhaps can be more customized to their individual needs and preferences.
So, if a 401(k) participant were to invest in the Small Cap Growth Index option through their plan using the Vanguard Small Cap Growth ETF (ticker symbol VBK) as our proxy, they would have experienced a return of 12.75% over the last ten years (as of 5/31/2020), before any plan fees. However if the participant would have pursued the self-directed option, utilizing Whitaker-Myers Wealth Managers, as their investment advisor, our small cap growth fund option is typically Brown Capital Management Small Company Fund (ticker symbol BCSIX) which has returned 17.28% over that same ten year time period. Of course, when utilizing an investment advisor, you would need to account for the cost of the advisor and we always note that past performance, while helpful in understanding a fund manager’s ability to find value in the market through their stock selection, is no guarantee of future performance.
How to know if Whitaker-Myers Wealth Managers can help with your 401(k) self-directed brokerage option...
If the self-directed plan is held through Charles Schwab (many are either held through Schwab, Fidelity or TD Ameritrade), Whitaker-Myers Wealth Managers can not only select the investment options for your plan but we can also rebalance, monitor, make changes, and give customized reporting on the balances in their plan. For the right investor, this may be very appealing.
Should you be interested in determining if your plan has a self-directed option, please reach out to your Whitaker-Myers Wealth Managers financial advisor or call your plan Recordkeeper (whomever sends your statements) and ask if they provide you with a self-directed option. If so, should the plan custody those assets at Charles Schwab, we can start providing investment management on your plan by completing basic Schwab paperwork. Should your company provide the self-directed option, through TD Ameritrade, it is likely that Whitaker-Myers Wealth Managers, will be able to provide investment management on those accounts around the end of 2020, when Schwab’s acquisition of TD is complete.
If you have questions, you can reach out to one of the Whitaker-Myers Wealth Managers Advisors, HERE!
Whitaker-Myers Wealth Managers, LTD is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.