How to Take Control of Your 401(k)

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I’m a bargain hunter. I love finding the best deal on a product to make sure that I’m truly getting my money’s worth.

And there is one thing I do before ever purchasing an item — I Google it.

Not so much for the reviews — my mind is pretty set on what I want before then. But I want to compare prices. Paying a higher amount for the exact same item that is cheaper at a different location is a waste of money.

When it comes to your 401(k), you pay different fees depending on what funds you select.

For the most part, there isn’t much shopping to do since you have only a few plans to pick from, but for a lucky few of us, there may be a way to open up these investment options…

401(k)s are often referred to as the most neglected account we have. We spend a lifetime working hard and stashing away a little bit of cash on a regular basis, but are we really doing anything to make sure this nest egg grows faster than inflation can eat away at it?

Many blame this phenomenon on laziness or a lack of confidence in people like you and me managing such an important account.

But I blame the system.

The reason most 401(k)s receive little to no attention is because the investment options available are so abysmally limited. With just a few funds to choose from, there isn’t much point to frequently checking it or reallocating the funds to take advantage or protect against long-term shifts in the market.

To unlock your 401(k), there is only one option to look for — a self-directed brokerage account.

Take Control of Your Retirement Savings

A self-directed brokerage account operates the same as a typical 401(k) account in that a set percentage is deducted from your paycheck and placed into an account to be invested until your retirement. But while a 401(k) has a limited number of choices when it comes to what you can invest in, a self-directed account expands your options. In some cases, it may unlock access to stocks, options or bonds. While in others, it may just open the door to several more mutual funds where you can do your own shopping to find lower fees, find the best fund managers or pick based on past performance.

In either case, your options have expanded significantly and that puts you in better control of your cash.

For me, it’s a no-brainer.

You can use the self-directed option to lower fees as well as diversify your assets across sectors and markets.

Even if you are a beginner investor, you could use this to shop mutual funds.

Are you aware of what you’re spending on fees each year just to own shares of a mutual fund? While some index funds — which require minimal management on the part of the brokerage company — charge only 0.04% per year, other more actively managed funds are charging upward of 2%, but are still lagging their benchmarks.

And that’s on top of any fees you might get stuck paying to buy into the fund or sell the shares. There are better ways to save for your retirement than handing your money over to a fund manager.

A self-directed account could also unlock stock and exchange-traded funds (ETFs), which you could even use to mimic your previous asset allocation in your 401(k) but without the fees.

These are two simple examples.

For more advanced investors, you can use this option to manage your own 401(k) by directing funds to different areas of the market as you see fit.

You would no longer be limited to the select few options your plan offers. Instead you put the power in your hands, whether it’s to shop mutual funds, utilize unique investment strategies or lower the fees you are currently paying.

Know Your Options

To be sure, not every 401(k) plan offers a self-directed option.

At the moment, only a little over a quarter of all plans have this option available, but the number is steadily rising. And if you tell your plan administrator this is an option you are interested in, they may be able to add it in the near future.

But of those plans that have a self-directed option available, only 1% to 2% of plan participants take advantage of it.

This tells me not enough people know this option exists, which is the essence of my discussion today.

Plan providers and policy administrators have long believed that the fewer options the better. But this leaves your most important retirement account at the liberty of the best mutual fund salesman on the block — not who is going to take the best care of your retirement portfolio.

Ask. Follow up. And unlock your 401(k). Planning for your retirement is not a one-size-fits-all solution and no one is going to care as much about your retirement as you will.

Take control now.

Chad Shoop Sovereign Investor
Chad Shoop
Editor, Pure Income