With more access to financial education and investment options, 401(k) participants are more informed, more engaged, and more vocal than ever before about the funds available in their retirement plans.
We have seen a growing interest in the ability to invest beyond the fund lineup offered by an employer-provided retirement plan. Whether employees are looking for investments that align with their values or provide unique diversification opportunities, it can be difficult to build a plan lineup that satisfies everyone. One way that plan sponsors are meeting this new demand is by adding self-directed brokerage options to their 401(k) program. Here’s what employers must know about these options.
The Benefit of Additional Investment Flexibility
Self-directed brokerage options give employees the ability to invest in options outside of the core investment lineup. For experienced investors, this allows more flexibility to customize their retirement strategy to meet their investment goals. Additional investment options include a larger menu of mutual funds which may include strategies focused on various ESG mandates and faith-based options.
The brokerage window can also offer access to ETFs including unique strategies that track cryptocurrencies, specific sectors, and regionally focused funds. Employees can also invest in individual equities and fixed income securities. While many of these options aren’t appropriate for the core investment menu of a 401(k) plan, they may be valuable to specific employees.
Self-Directed Brokerage Trends
The addition of a self-directed brokerage window to 401(k) plans has gained significant traction over the last few years. According to PlanSponsor’s 2024 Defined Contribution Survey, roughly 30% of all plans surveyed now include a self-directed brokerage window. The number increases for larger plans — over 55% of surveyed plans with over $200 million in assets include the option. According to their latest public filings, all 10 of the largest cap-weighed companies in the S&P 500 included a self-directed brokerage window.
Drawbacks to Adding a Self-Directed Brokerage Window
While there are many benefits to adding a self-directed brokerage window, there are also some drawbacks that plan sponsors should carefully consider before adding the option to their plans.
While plan sponsors have the fiduciary responsibility to add and monitor options that are appropriate for a 401(k) plan, the added flexibility increases the risk of poor investment decisions or overtrading. For example, participants could misuse the brokerage window by investing in speculative options that may not be prudent for a retirement savings vehicle.
There is also the potential for higher costs. Brokerage accounts can include trading fees, annual account maintenance fees, and options with higher investment management expenses than investments included in the core lineup. Managing and monitoring the brokerage window can also come with additional administrative complexity for plan recordkeepers, auditors, and sponsors.
Plan Sponsor Best Practices
As a plan sponsor, it’s important to carefully vet and monitor the self-directed brokerage provider. As the fiduciary, ensuring that all fees are reasonable and clearly disclosed to employees is a requirement. The service provider should include education material for plan participants, including a description of the risks associated with leveraging a self-directed brokerage window along with the fees for using the option. As with any other plan design or investment update, it’s important to work with an advisor to vet the option and carefully document the fiduciary process.
Need help with your 401(k) plan?
Now that you know the trends and some items to consider with a self-directed brokerage, you can weigh them against your company’s short- and long-term goals. If you need help, Sequoia’s advisors can help you craft a 401(k) that best serves your employees and your business needs. A Sequoia advisor is ready to listen and answer your questions.
Source: PLANSPONSOR 2024 Defined Contribution (DC) Survey. Valid through December 31, 2025. © Asset International, Inc. 2025
Pensionmark® Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC). Pensionmark Financial Group, LLC/Pensionmark Securities, LLC and Sequoia Benefits, LLC are non-affiliated entities. This information is for educational purposes only. Neither Pensionmark Financial Group, LLC (“Pensionmark”) nor its advisers provide tax or legal advice. Please consult with an appropriate tax or legal professional.
