What to Know Before Adding an SDBA to Your Plan

Self-directed brokerage accounts offer a multitude of options to the hands-on investor, but there are pros and cons of allowing retirement plan participants to use them.

As more participants engage with their investments and take a more hands-on approach, sources say self-directed brokerage accounts (SDBAs) are becoming increasingly popular.

The accounts allow investors who are enrolled in a defined contribution (DC) retirement plan to access mutual funds, stocks, bonds, exchange-traded funds (ETFs) and more. SDBAs allow participants to select investments outside of the core menu lineup, explains Nathan Voris, senior managing director of business strategy at Schwab Retirement Plan Services. “It provides a window for 401(k) participants to access a much broader component of the market versus what has been a traditional core menu for the 401(k),” he says.

For participants to invest in an SDBA, their retirement plan would first have to offer it as an investment option, says Renée Pastor, founder and wealth manager of the Pastor Financial Group, who specializes in 401(k) management. Plan sponsors would work with their consultants to learn more about their recordkeeper’s options for due diligence and ultimately add the platform as an option, Voris notes.

Then, the participant would fill out an application to enroll online with the recordkeeper. “Most recordkeepers have one or more SDBA providers on their platform. In the same way that a 401(k) provider or recordkeeper offers advice on managed accounts and target-date funds [TDFs], a brokerage window is one of those tools that really every recordkeeper has,” Voris says.

Because SDBAs do not add much additional cost to the plan sponsor and can be offered as an added benefit and choice to the participant, more employers are adopting the investment option, Pastor says. “Some SDBAs can open up to almost anything: individual stocks, bonds, ETFs. Some of them open up to larger mutual fund windows,” she says.

However, this level of accessibility is contingent upon plan sponsors, she notes. Employers can select the range of investments SDBAs offer, but even limited investment choices in an SDBA offer more than the plan menu itself, Pastor points out.

Flexibility at the participant level is another reason why DC plan sponsors may offer the option, especially for investors looking to engage with their finances, Voris says.

“This is a space for participants who want more flexibility, are more engaged with their retirement savings and want to invest beyond what is offered in the core menu,” he says. Additionally, many participants who leverage a brokerage window have a financial adviser who is attached to the feature.

However, plan sponsors should consider implementing some barriers in offering an SDBA, Voris says. One popular disadvantage are the accounts’ fees, which may be higher than the plan’s core menu.

“What you don’t want is a window that is assessing fees that may be above and beyond what the average 401(k) participant is paying,” Voris says. Yet he adds that more trading and other administrative fees are decreasing as providers lower or remove maintenance charges. Still, he recommends that sponsors check in with their recordkeepers and providers to assess whether fees are reasonable when considering the option.

Another concern is which participants will use the brokerage window. Voris notes a common worry among employers is that participants will use the option to day trade, though Schwab’s data shows SDBA users traded approximately 14 times per quarter in 2020. Some plan sponsors are also concerned about emotional investors or those who lack the discipline to manage their portfolios during market volatility.

In these scenarios, Pastor says she believes it’s up to employers to take action, such as by allowing participants to hire a third-party financial adviser for help. “Plan sponsors need to go a couple of extra steps beyond just offering the SDBA,” she says.