If you have access to a 401k brokerage window, you have an incredible tool to diversify your 401k holdings and help you reach your target asset allocation. A brokerage window–sometimes known as a self-directed brokerage account or SDBA–gives you access to investments that are outside of the standard lineup of mutual funds that are available in your 401k plan. Because you have access to more investments, that means you have access to more asset classes. This can help you reach your target asset allocation.
First: A Caveat
Before I explain how a brokerage window works, I have a bit of bad news: Most 401k plans don’t have brokerage windows. Between my wife and I, we have participated in at least ten different 401k plans over the course of our careers. Only one of them has offered a brokerage window. Investment News reports that a little less than half of 401k plans have them, and relatively few savers take advantage of them. So if you have access to a brokerage window, you are lucky and you should take advantage of it!
How It Works
My wife’s current 401k plan has a brokerage window. Here’s how it works.
Her 401k plan is managed by Empower Retirement. The plan offers 22 investment options, including ten target date funds and 12 mutual funds. Of the mutual funds, about 50% are Vanguard index funds and the rest are actively managed funds.
It’s a pretty good lineup of funds, but it does not offer all of the asset classes that we like to use. Specifically, it lacks small value, international large value, international small blend, international small value, REITs, and emerging markets funds. Our target asset allocation includes all of these asset classes. Because my wife’s 401k constitutes about half of our retirement assets, it would be pretty hard to maintain our target asset allocation if we didn’t have access to these asset classes in her 401k plan.
That’s where the brokerage window comes in.
Her 401k plan offers a brokerage window with TD Ameritrade. This gives participants access to virtually all of the investment offerings that TD Ameritrade offers to its clients. That means we have access to all of the asset classes we want, including those that the 401k plan does not provide in its lineup of mutual funds. About 45% of my wife’s 401k balance is invested through the brokerage window, and that lets us maintain our overall target asset allocation. Also, we aren’t limited to just mutual funds–all of our brokerage window investments are ETFs.
Details, Details, Details
Here are a few other details about how her brokerage window works. If you have access to a brokerage window, the details of your plan may be different.
- The plan allows participants to invest up to 50% of their plan assets in the brokerage window. We use the standard plan offerings for common asset classes like large blend and we use the brokerage window for the less common asset classes.
- There are actually two brokerage windows, one for traditional 401k assets and one for Roth 401k assets. Her plan is very good about allowing participants to manage traditional and Roth funds separately.
- There is a $15 quarterly fee for using the brokerage window.
- Moving assets into the brokerage window is very quick, but moving them out takes a few days. This is because once she sells funds in the brokerage window, the cash is not available to transfer back to the main account until the transaction settles, which is usually three business days. This is a bit of a pain when we do our annual rebalancing.
Even with these small limitations, the 401k brokerage window gives us tremendous investing flexibility. It lets us invest in funds that are not included in the 401k lineup of funds. This lets us maintain our overall target asset allocation with relatively few constraints.
