How to Improve Your Retirement Plan Choices with an SDBA

If you work for one of the 40% of employers that offer a self-directed brokerage account (SDBA) within their 401k plan[1], then you have access to what I believe is one of the best “secret” benefits of your retirement account. What is an SDBA and how can it apply to you?

Let’s break it down and find out!

Your 401k/403b:
The plan sponsor of your 401k/403b is responsible for choosing the investment options available to you. Since the sponsor is charged with a fiduciary responsibility, plans typically limit employees to a small number of mutual funds and bond funds in several asset classes to give you a narrow band of diversification. This is intended to protect employees who are not investment-savvy from ending up with a portfolio that is wildly unsuitable for them.

This protection comes with some hefty limitations. Want a REIT fund? Some plans do not offer them. The expense ratios are moderately high? Too bad. Looking for tax-efficient ETFs? You may only have mutual funds.

Cue the SDBA.

How does it work?
If available, you will most likely see it listed right along with your other investment options. It can have other names depending on your custodian: BrokerageLink (Fidelity), Personal Choice Retirement Account (Schwab), etc. To invest in the SBDA, go to your investment elections and select the percentage you would like for your portfolio. This will open the account for you.

A lot of clients get tripped up here. You still have your 401k, which is an account under the same umbrella. When you log onto 401k portal, you will likely see two accounts listed, i.e.:

“John Smith X Company 401k/403b Plan”
“John Smith X Company SDBA”

Once the SDBA is open, the options available to you are generally unlimited.

The Fine Print:
It is important to familiarize yourself with your employer’s rules. Given the freedom the SDBA provides, it will be tempting to put 100% of your retirement balance into it. However, some employers require you to keep a balance in your “regular” 401k. This may be as low as $1,000 or as high as 50% of your account balance.

There also may be rules limiting how many funds you can transfer each time or that require a minimum dollar amount. And of course, freedom comes at a price. The custodian often, but not always, charges an annual or quarterly fee for the SDBA option. We typically see ~$50/yr, which I consider a pretty good tradeoff for the variety of choices you now have.

Who Benefits?
Anyone who is educated and comfortable with picking their own investments or working with a financial advisor who can help you develop your optimal portfolio should strongly consider whether the SDBA is right for them.

[1] Cussen, M. P. (2019, March 12). The Rise of 401(k) Brokerage Accounts. Retrieved May 15, 2019, from https://www.investopedia.com/articles/personal-finance/061314/rise-401k-brokerage-accounts.asp