WHICH TYPE OF RETIREMENT PLAN INVESTOR ARE YOU?

Are you generally satisfied with the core set of investment vehicles offered through your employer’s retirement plan? Does quarterly viewing of statements and occasionally signing into a digital dashboard typically suffice when it comes to monitoring your retirement plan balances? Or, are you a more involved investor? Do you wish you had access to a broader range of asset investment opportunities for your company-sponsored plan so that you can more specifically call the shots with your investment dollars?  

AN ALTERNATIVE APPROACH — FOR SOME

For those who seek more control of the investments within their retirement savings plan, an option exists. Offered by approximately 40% of employers, a self-directed brokerage account (SDBA) allows retirement savers to take a more hands-on approach to managing their money. There are some things to consider before jumping into what, on the surface, may seem to be a good way to grow your retirement savings more aggressively. You need to understand the pros, cons and a few caveats that go along with self-directed brokerage accounts. But first…  

WHAT EXACTLY IS A SELF-DIRECTED BROKERAGE ACCOUNT (SDBA)?

SDBAs enable retirement plan participants to make investments outside of the limited number of options typically available within their 401(k)’s, or 403(b)’s, core offerings. This wider array of investment opportunities available via self-directed brokerage accounts often includes stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other securities. ETFs, in particular, have seen a recent uptick in popularity, due in part to volatile markets.  According to human resources consulting and outsourcing firm, Aon Hewitt, approximately 40% of employers offer SDBAs within their retirement plans. However, not many retirement plan investors choose to take advantage of SDBAs. Aon Hewitt has reported participation rates at only 3-4%. This low rate is likely due to a correctly-assumed need for sufficient investment experience.  

WHAT YOU SHOULD KNOW ABOUT SDBAS

As with any other impactful decision, if you’re thinking about participating in a self-directed brokerage account, you need to be informed. Consider the advantages and disadvantages of SDBAs. Evaluate whether one will fit your specific financial situation, investing “personality” and ability to spend sufficient time directing your investment dollars. To help with those considerations, we’ve boiled down some key points… Potential Benefits

• Greater control – SDBAs are self-directed, so you’re in the driver’s seat. You make your choices in a more specific and detailed manner, deciding where you’d like your investment dollars to go. Simply put, it’s a more hands-on investing approach.
• More flexibility & diversity – You can access a much larger variety of investment options. This allows you to fill in the gaps on what you may see as missing asset classes within your standard retirement plan offerings. Examples of these assets might be emerging markets, international small cap or real estate and commodities.
• You don’t have to go “all-in” – Most retirement plans with SDBA options allow you to allocate only part of your retirement savings to these accounts. This helps mitigate any risks that may be associated with your hand-picked investments. It also means you can benefit from the overall chosen set of plan investments while still rounding out your portfolio with other investment choices.

  Possible Pitfalls

• More attention (and calm) is required – SDBAs should be carefully monitored. Do you have the bandwidth and discipline to give a self-directed account the kind of attention an SDBA requires? And, equally important — can you avoid being overly reactive to the invariable performance blips, both big and small?
• Understand the fees – You need to be clear on the various fees associated with both your core retirement plan’s investments as well as those that come with a self-directed account. Being uninformed on items like transaction costs and commissions could have a negative impact on what you assume will be higher returns.
• Not for the casual investor – The benefits of control and breadth of choice can also be liabilities. You must be knowledgeable and comfortable enough to make sound investment decisions amongst an overwhelming number of options. Not everyone is in a position to take on the increased risk that comes with access to a large set of diverse investments, some of which they might not be very familiar with.

  More to Consider — Increased Risk of Loss Over the years, self-directed brokerage accounts have raised concerns in fiduciary and legal circles because they allow investors to take much greater risks with retirement savings. Because not everyone has the same access to investment information, guidance and experience, SDBAs can put less-informed investors at an increased risk of loss. Investing and finance education website, Investopedia, recently wrote — “Plan sponsors that offer brokerage accounts should carefully analyze the potential liability of substantial losses sustained by novice investors. Many sponsors believe that they cannot be held responsible for what happens in these accounts, but many benefits experts and attorneys say otherwise. All other investment options inside qualified plans are required to meet certain fiduciary characteristics, even if they are aggressive in nature. But a large percentage of the investment options that participants can purchase in a brokerage account will fail to meet this standard.”    Numbers of Note Published quarterly, the Schwab Self-Directed Brokerage Account Indicators report contains data associated with approximately 137,000 SDBAs. The trends and statistics presented in the report may help give you a better feel for whether a self-directed brokerage account is where you want to place a portion of your retirement plan dollars. Below are some interesting numbers on SDBA balances, asset allocations and generational behavior from their most recent report:

• Mutual funds make up the highest percentage of participant assets at 37%, of which large-cap funds receive the highest allocation.
• Equities account for 28% of SDBA assets.
• 15% of participant assets are allocated to cash.
• Fixed-income assets account for 3% of SDBA assets.
• Participants average 2.2 trades per month.

 

WHO TAKES ADVANTAGE OF SELF-DIRECTED BROKERAGE ACCOUNTS?

SDBAs don’t necessarily make sense for all employers or individuals. These accounts have typically been for those with big balances and plenty of financial acumen. The level of comfort and knowledge needed to make good use of an SDBA option is most frequently found among high-earners. Financially-savvy legal, medical and consulting professionals are often participants with SDBAs. According to David Wray, President of the Plan Sponsor Council of America (PSCA), “It was a standard plan design, especially for law firms, historically.” He goes on to say, “the people who use [brokerage windows] are typically highly paid – not your typical 401(k) participant going into a target-date fund.” Of course, there are exceptions to this “high-earner” profile, and you may be one of them. Only you can make that determination.  

SHOULD YOU OPEN A SELF-DIRECTED BROKERAGE ACCOUNT?

As with almost any scenario that presents the opportunity for greater reward, greater risk also comes along with the territory on SDBAs. Educating yourself with timely and relevant information is the best way to make a smart choice that works for your investing style and retirement goals. After you determine that your employer offers an SDBA option as part of their retirement plan, seek out whatever information the plan administrator offers. After you’ve confirmed that your retirement plan includes an SDBA option, it’s all about leveraging trusted resources to help you make an informed decision. Trusted resources come in many forms such as your existing investment advisor or broker-dealer, known investment sites like Investopedia and ThinkAdvisor, mainstream news sources — and personal sources like investment-savvy family and friends.  

A REMINDER

Lastly, if indeed you do decide to take advantage of a self-directed brokerage account, remember — having a pre-set investment plan in place is essential. Giving in to the temptation of thinking you can time the market, buying low and selling high, chasing “hot” stocks or funds, and simply, “going with your gut” are all recipes for loss. Do your best to remove emotion from the equation and stick to your plan.   Contact Howard Capital Management, Inc. At Howard Capital Management, Inc. (HCM), we understand how important it is to work with someone you trust, that can create and deliver tools and technology to help you navigate the market with ease.  By planning for your financial future now, you can make your retirement an exciting and smooth transition.