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How to buy stocks in a 401k

Updated: Aug 7, 2018



A 401k has been traditionally limited to a menu of investment choices that have been pre-selected by the employer or plan sponsor. This menu is meant to give employees a choice of investment options that is intentionally limited - for reasons that are based in behavioral economics. The idea is this: first, limiting investment options actually increases the chances employees will pick one of them and utilize their 401k plan (a good thing). Second, the investments have been pre-screened (hopefully) and employees won't hurt their retirement nest egg too bad by picking any one them (another good thing but less good). The problem with this nice and neat plan is that each employee has his or her own unique financial needs who want more flexibility with their investments.


There's a new feature in 401k plans (not new, but probably new to you) that allows this type of employees to open what's called a brokerage window or technically, a Self-Directed Brokerage Account. An SDBA gives employees in a 401k plan acces to investments that are not included in the plan's core menu. Investments like:

  • Individual stocks (think Amazon, Apple, Facebook, Tesla, etc.)

  • Socially conscious funds (Parnassus Endeavor fund, etc.)

  • Model Portfolios like these that we offer

  • Low cost index funds that generally outperform mutual funds

SDBAs allow employees who want more flexibility a way to pursue a more actively managed investment strategy. This is increasingly becoming popular with younger employees who want to be more involved in their own investment decisions.


Employers who sponsor a 401k plan should consider adding an SDBA (not available with all plans) by asking some key questions:

  1. Do our employees want more investment flexibility?

  2. Do employees want personalized advice from an investment advisor?

  3. Is our 401k plan attractive enough for employees to join the plan? If not, an SDBA can make it more attractive.

Let's look at an example. In this scenario, a medical office has 200 employees; doctors, nurses, administrative and other staff. The employees have different needs, and are in various life stages and income levels. To accomodate this broad spectrum of people, a traditional 401k pan with 10 - 15 investment options may not be sufficient. A better way to approach this would be to have a 3-tired investment menu:


Tier 1: Core investments in the 401k plan


Tier 2: Professionally-managed investments (target date funds, all-in-one funds, etc.)


Tier 3: Self-Directed Brokerage Account


Having all three tiers allows for employees who want more choice and for employees who want to set it and forget it. All income levels and needs can be met.


There are some special considerations when deciding whether to add a brokerage window to a 401k plan. We're happy to discuss these with plan sponsors. If you would like to learn more about modern features of 401k plans like SDBAs, reach out to us and we'll set up a free demo of what it looks like.