For many investors, one common drawback to contributing to a standard employer-sponsored retirement plan is the limited number of investment options available to participants. While plans have improved over the past decade in allowing a wider menu of choices, many plans still only offer standard “cookie-cutter” mutual fund options that may also have higher-than-average expense ratios. Some participants, especially younger ones, may be more investment savvy and may prefer alternatives, such as low-cost exchange-traded funds (ETFs) and other index-based investments that are unavailable to them in the run-of-the-mill program.
To address this need, up to 40% of companies now allow a self-directed brokerage account (SDBA) within their retirement savings plan. This option would allow a participant to expand their range of investment choices beyond the basic menu of funds, but also to take advantage of investment opportunities that arise in different market conditions, particularly with the assistance and guidance of experienced investment advisors.
At AllGen Financial Advisors, we provide such guidance via our in-house investment management process that includes how a 401(k) account could be allocated and coordinated with the rest of their investment management. Let’s look at how a self-directed account works, using a program offered by Charles Schwab (the Personal Choice Retirement Account® (PCRA)) as an example.
A Personalized Retirement Account: How it Works
First, the retirement plan must allow a SBDA (or PCRA) to be included within the plan. The plan sponsor (employer) then may establish what types of investments would be available within the PCRA for the participant to choose from. Ideally (since the plan sponsor is still held to fiduciary oversight responsibilities under ERISA regulations) the investments allowed would be diverse and different enough from other plan choices to be worthwhile, yet not be overly risky or complicated for the average investor to understand.
Next, the participant would designate how much of their overall retirement account would be invested in the PCRA and select their investment choices within the brokerage account to complement their other investments in the overall account to realize diversification and other investment goals.
Utilizing Professional Advisor Guidance
This is where the expertise of professional investment management may play a significant role. While many investors realize the advantages of wider diversification and allocation outside the limited parameters of the average retirement plan menu, many may be hesitant to take on the task of researching and discerning which of the PCRA investments would be beneficial to their investment objectives.
With a program like the Schwab PCRA within a retirement savings program, participants may select a professional investment manager to assist them in self-designing their plan brokerage account to address their risk tolerance, time horizon, market conditions, and other personal investment criteria that follows their investment objectives as closely as possible. Moreover, if that participant has other investments outside the company retirement plan, the professional advisor can also assist in coordinating the plan investments to complement how the participant is invested elsewhere.
Do You Have a Self-Directed Option?
Oftentimes, participants enroll within the company retirement plan without realizing the full extent of the investment choices available. Many often just choose the “default” option, which may be a so-called target-retirement fund, without exploring and investigating further.
For those who wish to have more choice in how their money is invested or feel they might benefit from additional resources provided by a custodian such as Schwab, first find out if a SDBA option is included in your plan, then look into the details on this feature. If this isn’t included within the overall program, it may be beneficial to approach the employer to see if a SDBA option could be added to the retirement plan.
If the plan already includes the Schwab PCRA, then getting further guidance from our firm may be worthwhile.
A Helping Hand in Managing Retirement Savings
At AllGen Financial Advisors, we work with a broad range of clients to manage their savings, build solid portfolios, and gain financial literacy. When you contact us to talk about retirement, we explore a variety of options for making your money last and even continue growing, to find what works best for your unique situation.
To schedule a complimentary meeting, call (407) 210-3888 or email advisors@allgenfinancial.com. We look forward to speaking with you!
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