When you log on to your 401(k) website at, say, Fidelity, do you see a mysterious mention of a “BrokerageLink®”? Have you ever wondered what it is and whether you should use it?
BrokerageLink is just Fidelity’s version of a “brokerage window.” What is a brokerage window, you ask? Let me quote FINRA (big, important self-regulatory body for the investment industry):
Some 401(k) plan sponsors allow employees to venture beyond the plan’s core menu of investments. Employees can set up a brokerage account—called a 401(k) brokerage window—and choose among a wide array of securities such as stocks, bonds, exchange traded funds (ETFs) and mutual funds.
The way I think about is: if you don’t like the investment options you see inside your 401(k), you can go through a “window” to Fidelity or Vanguard or Morgan Stanley (whoever administers your 401(k)), set up a brokerage (investment) account, and there you’ll have more, possibly many more investment options.
This is also sometimes known as a “self-directed brokerage account.” There, now you have all the lingo. Go impress and bore all your friends.
I have used a brokerage window with exactly one of my clients. Why only one? Because most tech companies offer good enough 401(k) investment options, and I think it’s important (like, Really Important) to keep your finances as simple as reasonable.
(For that one client who used the brokerage window…mere months after we went through the rigamarole, her 401(k) improved mightily: it changed its target-date retirement funds to low-cost Vanguard funds. So we moved allll her money back over to her “core” 401(k).)
Not all 401(k)s offer brokerage windows. So, if you don’t have one in your 401(k), there’s one less choice you have to make in your financial life. This can be a good thing! In fact, limited choices are one of the things I think constitute an awesome 401(k).
But, assuming you have one available to you, it’s unlikely I would recommend you use it. It all comes down to a hassle vs. investment-quality consideration.
Things to Investigate Before Using Your Brokerage Window
How much hassle is it going to be?
What do you have to do in order to set things up initially? And, more importantly, what do you have to do in order to continue using the brokerage window? Can ongoing 401(k) paycheck contributions be automatically invested in the brokerage account investments, as they would be in your core 401(k)? Or will you have to manually invest the money every paycheck?
The higher the hassle, the more work you create for yourself in your financial life, the less likely you are to stay on top of it. I’d rather you have a slightly more expensive investment in your core 401(k) than find a better investment through the brokerage window…only to let the money sit in cash for months at a time because you can’t get around to investing it manually.
Are the investments available through the brokerage window actually any better than what you have in your core 401(k)?
My ardent wish for you is that you can invest in broadly diversified, low-cost investments in your 401(k). That is pretty much the most important thing in a 401(k) (well, perhaps other than a sweet match).
Many 401(k)s already have such investments in their core offering, meaning you won’t get much (if any) improvement by going through the brokerage window. To wit, “broadly diversified + low cost” usually = index fund.
Bigger 401(k)s (the likes of Amazon, Facebook, and more recently Airbnb) usually offer good investments like this, including target-date retirement funds, and at an even lower cost than you can find as an individual investor. It is therefore unlikely the brokerage window will benefit you much. I’d expect brokerage windows to be more helpful in 401(k) plans for smaller companies.
What are the restrictions or other gotchas with the brokerage window?
- Are the investment options restricted once you get to Fidelity/Vanguard/Merrill Lynch? Or do you have the entire universe at your fingertips?
- Can you push every dollar in your 401(k) through the brokerage window, or do you have to keep a certain minimum dollar amount in your core 401(k)?
- Are there any costs associated with using the brokerage window?
- Are there only certain times, certain, shall we say, “windows” during which you can move your money to and from the brokerage account?
It’s probably reasonable to stay inside your core 401(k) if you can find any of these investments there:
- An all-in-one fund like a target-date retirement fund with an expense ratio of, say, 0.30% or under,
- A small collection of broadly diversified, low cost funds that, together, give you the same kind of exposure as a target-date fund: US stocks, international stocks, and US bonds. In fact, these individual funds are often less expensive than target-date funds…but they’re more complicated because, well, it’s three funds instead of one.
- Only one good, broadly diversified low-cost fund, like an S&P 500 fund, but your 401(k) balance is relatively small (you can worry about getting a more diversified portfolio later when you have more money invested)
You should not consider a brokerage window your chance to get craaaazy with your investments. If you want to play with investments, go put a few thousand dollars in a Robinhood account and Have At It. Imagine yourself the next Warren Buffet. Your retirement money needs to be as boring as the day is long (which is what Warren Buffet in fact famously recommends for most people).
Brokerage windows can be helpful if your 401(k) investments are particularly bad. If they’re good enough, staying inside your core 401(k) is probably going to work out better because it keeps your 401(k) investing super easy. And “easy” means you’ll do a better job with it.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.