Mutual funds dominate the 401(k) landscape, but an investor can opt for exchange traded funds in their 401(k)s if the employer includes a brokerage window, or self-directed 401(k), option.
The brokerage window basically acts like a brokerage account embedded within the retirement plan, writes Adam Zoll for Morningstar. [Build a Diversified 401(k) Portfolio with Six ETFs]
Around 17% of 401(k) plans offered a brokerage window option as of 2012. Potential investors, though, should be aware that plans may vary, with some options only allowing for mutual funds while others include stocks and ETFs. [How Low-Cost ETFs Can Help Boost Your 401(k) Returns]
Before diving in head first, there are some considerations. Investors should look into a brokerage window if it makes sense. Many 401(k)s offer a diverse range of asset classes, but some investors may want more options, such as dedicated emerging market, high-yield, real estate or small-cap exposure to name a few. With ETFs, investors can track a wider range of options.
A 401(k) investors should not utilize the brokerage window as a means for trading or timing the market. The option is not an invitation to begin dabbling in gut instincts. A well-designed 401(k) provides the right mix of equity, fixed-income and alternative assets that suit an investor’s time horizon.
With a brokerage window, investors will have to pay a commission on trades, so costs on regular, paycheck-to-paycheck contributions may add up. Investors should make contributions periodically or look into commission-free funds available on the brokerage platform. [Six Popular Commission-Free ETF Trading Platforms]
Alternatively, savers may also redirect a portion of the money into an IRA instead. The adjusted gross income limits to contribute to a traditional, tax deductible IRA for taxpayers who take part in a workplace retirement plan are $70,000 for singles and $116,000 for married couples who file jointly. For Roth IRAs, income limits are $129,000 for singles and $191,000 for joint filings.
For more information on ETFs in 401(k)s, visit our 401(k) category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.