What Is a Self-Directed Brokerage Account?

Self-directed accounts for retirement.

Any stock broker account, usually with trades made online, is a self-directed account if the investor does her own research and picks the specific investments. The term self-directed brokerage account usually refers to a specific option in 401k and defined-contribution pension plans.

History

Typically 401k and other contribution-based pension plans offered participants a limited number of mutual funds or fixed return accounts for investment. In the late 1990s employer sponsored plans started to offer broader investment options through self-directed brokerage accounts.

Function

If an employer pension plan has a self-directed options, participants invest in a wide range of stocks, bonds or precious metals.

Potential

Experienced investors can use the self-directed option to pick investments that may perform significantly better than the mutual funds offered in the plan.

Considerations

Self-directed brokerage accounts will have higher fees and commissions than the typical 401k plan. Plan participants become more responsible for the performance of their invested retirement assets.

Warning

According to the Financial Planning Association, self-directed plan participants can significantly increase the risk in their retirement plans by focusing the assets on only a few stocks.

References

• JP Morgan: Self-directed brokerage accounts in retirement plans
• accounting.net: Financial Planning Association: Pros and Cons of Self-directed 401ks