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What physicians need to know about the self-directed brokerage option for their 401(k)


Making your 401(k) self-directed can offer advantages for physicians who use financial advisors.

Rare is the occasion when you can have your cake and eat it, too—especially in financial matters. But sometimes you can, though you may not be aware that it’s possible. This may be the case regarding the potential option of making your 401(k) account self-directed.

The self-directed option holds the greatest potential advantages for high earners, including physicians and other high-earning health care professionals who work as employees at large healthcare organizations and hospitals. It can mean more money for retirement, but it can also increase risk if not approached correctly.

It’s widely known that 401(k) plans are one of the best benefits that many companies offer employees. Many of these plans involve contributions of company money to employees’ accounts, matching their own contributions up to a point. This is free money.

What’s more, taxes on this free money and your own contributions are deferred, reducing your annual tax bill while you’re still working and investing for retirement. These contributions can grow from investment returns tax-free until you take money out.

Despite these advantages, most 401(k) plans have the fundamental disadvantage: a limited array of investments. Many plans offer employee participants a menu with little more than a narrow matrix of basic stock mutual funds representing different styles and sectors. While many companies acting as plan sponsors provide some degree of paternalistic oversight, avoiding plans that include high-risk offerings, total returns are often limited by choices that are too few and fees--both from institutions holding plans and the investments offered--that are too high by competitive market standards.

Still, in many plans, employee accounts receive all-important employer matching money. But what if you could get the employer matching money and a far wider selection of investments? This would be the best of both worlds.

Some plans make this possible by allowing employee participants to open up what’s known as a brokerage window. This establishes linkage with a brokerage to allow access to the vast universe of publicly traded investments, which can be purchased using available 401(k) funds. That’s only if your plan allows this. To find out, you can check with HR and, if so, determine the steps to take, forms to fill out, etc.

Typically, few employees are aware of this option. It may be mentioned deep in the weeds of plan rules that few employees read. Yet more employees have been making their accounts self-directed in recent years, as an estimated 40% of plans now allow it.

Instead of being limited to the standard, limited 401(k) investment fare, employees with self-directed plans can choose from myriad types of asset-class funds--index funds, mutual funds, exchange-traded funds—as well as individual bonds, stocks, real estate and other investments.

Choosing the self-directed option usually isn’t a good idea for people without substantial assets. But that doesn’t mean it’s necessarily a good idea for anyone with substantial assets.

This infinitely broader array of choices can enhance your portfolio’s ultimate growth over the long term—if you choose and manage wisely. But this can also significantly increase risk if you lack the requisite knowledge, skills and experience.

So unless you’re a highly sophisticated individual investor, it’s a good idea to transition to a self-directed plan with the advice, guidance and active involvement of a highly qualified, true fiduciary advisor. This is one who will always put clients’ interests ahead or his or her own.

As is true with routine 401(k) accounts, self-directed accounts should be managed holistically—with your other accounts in mind. Too often, investors have far too much exposure to some assets and not enough to others because they don’t manage their 401(k) accounts with an eye toward all their holdings. This can increase the risk of your overall portfolio’s becoming over-concentrated in a particular asset or under-exposed to others. As switching over to a self-directed account can incur additional costs, it’s a good idea to bring your advisor in-- before you make this election--to evaluate this.

All too often, people set up their 401(k) plan investments and then ignore them, perhaps until they leave the company. This set-it-and-forget it tendency often yields suboptimal results because investors’ needs, goals and risk tolerances can change as they get older. With a self-directed account and a good advisor, you can keep your accounts current in these regards.

An advisor who’s a qualified wealth manager can not only handle this for you, but can also offer direction and advice on just about any financial matter of concern to wealthy individuals, including: investment management, financial planning, retirement planning, tax planning, cash flow management, estate planning (including trusts), education planning for kids and grandkids, and charitable giving. And a good wealth manager can manage your self-directed 401(k) account with these other matters in mind.

Self-directed accounts give you a lot of rope. Having a qualified advisor help you through it can keep you from inadvertently using this rope to hang yourself financially. This way, you can have your cake and eat it, too.

David Robinson, a Certified Financial Planner, is founder/CEO of RTS Private Wealth Management, an SEC-registered firm in Phoenix that provides fiduciary services to help clients achieve their financial goals. His practice focuses on helping wealthy individuals with custom financial plans, and using a holistic approach to grow/protect wealth, manage taxes, identify insurance solutions, prepare for retirement and manage estate plans.

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