Self Directed 401k

When it comes to funding retirement, a self directed 401k plan may give employees more options and opportunities to realize greater returns and accumulate more cash. Employer-provided plans usually stipulate a select number of investment vehicles from which employees can choose; but self-directed plans offer unlimited choices and more control. The difference is diversity. Employees seeking to diversify portfolios and still take advantage of employer-provided traditional retirement plans may opt for a self directed 401k. Investment vehicles for defined contribution plans are generally limited to the mutual funds, stocks and bonds trustees and plan administrators recommend. But, employees who choose to self-direct assets may have other preferences that are not offered through the plan. Employees can elect to deposit retirement plan contributions into a self-directed brokerage account (SDBA), which gives them full control over where investments are made. Studies indicate that savvy traders are more prone to self directed accounts than stock market rookies; and that employees who choose SDBAs tend to be on a higher pay scale. Financially secure company executives or single, up and coming managerial types may be more prone to risk losing money on a particularly hot commodity or overseas venture.

In a traditional 401k, employer and employees make pre-tax contributions which are held in a trust account, separate from company assets. Business owners can either match employee contributions, deposit a percentage of each employee's wages, or make contributions which combine the two options. A plan administrator acts as a fiduciary agent to perform administrative duties in managing the daily operation of the plan. A trustee -- either an individual, a financial management firm, or bank -- is responsible for accurately accounting funds, issuing benefits statements, and ensuring that assets are protected until distributions can be made to plan participants or beneficiaries -- either at retirement, termination of employment, or death. Trustees are also responsible for investing plan assets in money market funds, stocks, mutual funds, and other vehicles so that contributions can continue to earn greater returns. While some plans are established to allow participants to control asset investments, generally, an employer-provided traditional 401k limits investment choices to those that have good track records of net gains. Trustees and employers can potentially be held liable for losses if disgruntled plan participants can prove that investments were not prudently made. But a self directed 401k leaves investment decisions solely up to participants, therefore, the liability is solely theirs.

One disadvantage of a self directed plan is that a high-rolling participant may gamble on investments and lose; and a series of losses could ruin a well-laid retirement plan. In addition, participants who go solo may also incur additional administration and transaction fees, which cut into retirement assets. From the employer's perspective, workers who elect to control asset investment through self directed plans also present a degree of liability. Some employers offer workers SDBAs, but in the event that an investment fails to pay off as expected, business owners are the first to be blamed. But what if a majority of employees decided to choose a self directed 401k? If each employee's assets were invested in a different mutual funds, publicly traded stocks, and bonds, how would it affect the plan? To prevent dismantling an employer-sponsored 401k, companies which offer SDBAs limit self directed investments to only a percentage of individual employee's contributions.

The average worker may do well to rely on trustees or plan administrators to choose reliable investments which have proven to be lucrative in the past. The purpose of a 401k is to pool individual resources, which are collectively invested, for the collective benefit of a group of participants. Monies collectively invested afford a better opportunity to purchase a larger number of stocks, bonds and mutual funds; which can result in far greater returns than individuals singly investing smaller sums. Thus, too much diversity and self direction could have an adverse affect on the company retirement plan. Biblically speaking, a collective effort always benefits the whole: "Neither was there any among them that lacked: for as many as were possessors of lands or houses sold them, and brought the prices of the things that were sold. And laid them down at the apostle's feet: and distribution was made unto every man according as he had need (Acts 4:34-35).

Retirement planning is not only a concern for 9-to-5 employees, but also for the self-employed. But, defined contribution plans have traditionally been only available through corporations, small business enterprises, and industries. But ,the 401k for self employed sole proprietors with zero employees (freelancers, consultants, lawyers, performing artists, and healthcare providers) can make the dream of funding retirement a reality. Unlike a traditional plan, which limits annual contributions to $15,500 for participants under 50, the 401k for self employed entrepreneurs allows contributions of up to a whopping $44,000 a year! The catch up contribution for individuals over 50 is the same: $5,000. Ideally, a self-employed senior could rack up assets of nearly $50,000 in the first year of enrollment! The 401k for self employed individuals acts like a SDBA in that it allows participants to invest in an almost unlimited range of investments: from private and publicly held companies, commodities, and real estate to private equity, mutual funds and stocks. Collectibles, like insurance policies, personal residences, or any investment that can be personally benefited from are prohibited. The 401k for self employed persons gives individual entrepreneurs the same advantages as those workers who punch a clock. Employees who prefer to take control of retirement plan assets and investments should consider the self directed 401k and consult with plan administrators to see if opening a self directed brokerage account might be advantageous. Whether employed by a company or working solo, seeking the advice of a professional financial planner and exploring investment options is a prudent plan for a profitable future retirement.