Holding more than $3.5 trillion in total assets, Americans have a large amount invested in 401(k) plans, which have become the main way that most people save for their retirement. With so much riding on your plan, you must make good decisions about how to invest the money in order to meet your financial goals. Fortunately, in most cases, you do have options for investing your 401(k) yourself.
Most 401(k) plans offer some choices in where to allocate your investments. Even the most basic plans usually offer a fixed-rate option, as well as some mutual funds or plan-specific funds from which to choose. You generally choose between these funds when you open your account. Some plans may require you to wait until the open enrollment period to change your allocations, while others will let you change your allocations at any time, either by phone or with online tools.
According to the Plan Sponsor Council of America, one in every five employers offer a self-directed 401(k) option for participants. If your plan offers this option, it may call it a brokerage window. This allows you to purchase individual stocks, mutual funds or other investments that you choose that are not part of the normal 401(k) plan. Most plans charge a fee for this privilege, between $50 and $100 per year. In addition, you will need to pay the commission on your individual trades.
Many 401(k) plans will allow you to take an in-service withdrawal. This allows you to roll over your 401(k), or at least a portion of it, to an individual retirement account, keeping the tax-advantaged status of your money. In addition, you will have full control of your IRA account, and also can select a self-directed IRA if you wish to choose more nontraditional investments such as real estate or shares of privately held companies. Most companies allowing in-service withdrawals allow them starting at age 59 1/2.
Advantages and Disadvantages
Many 401(k) plans do not allow investors the diversification they desire to avoid unnecessary risk, or they don't provide aggressive enough investment options for employees to grow their money in the long term. By taking control of your 401(k) account, you can overcome this lack of choice. However, you also could pick poorly, choosing mutual funds with poor managers or high fees, or you could lose substantial portions of your retirement savings to commissions and fees because you trade too often.
Dealing with Poor Choices
If your 401(k) has investment choices that do not allow you to diversify or invest the way you like, you can partially overcome this by putting money into your own IRA, and invest that IRA in the missing asset classes. If your spouse's 401(k) offers what is missing from yours, you also can allocate more money into her account to do the same. In addition, you can speak with your 401(k) plan administrator or trustee about your investment needs. Over time, you may see your own plan's offerings improve.