Brokerage windows are a checklist answer protecting an old-school business model

401(k)‘s are unkind to savers in many ways.

After last week’s post on the top­ic, ‘It’s hard not to hate on 401(k)s’, I received a good ques­tion as fol­lowup:

What do you think of a bro­ker­age win­dow in the 401k to allow invest­ments in indi­vid­ual funds/stocks?

A bro­ker­age win­dow is the abil­i­ty for a 401(k) hold­er to have con­trol over at least some of the invest­ments in their 401(k).

While there are some plans that “do the right thing” (in gen­er­al, not just in regards to a bro­ker­age win­dow), I think most plans that offer some­thing are so that HR can respond to inquiries by say­ing “you can invest some of your 401(k) in indi­vid­ual stocks”. It’s a check­list item, and com­pa­nies look no fur­ther into how it’s imple­ment­ed.

The real­i­ty is very dif­fer­ent. Aside from being “hid­den” and blocked by paper­work, they’re often an expen­sive fea­ture to take advan­tage of — espe­cial­ly in com­par­i­son to typ­i­cal bro­ker­age accounts from com­pa­nies like Fidelity, Etrade, & Charles Schwab.

In my par­tic­u­lar case, I remem­ber also that I could only invest some per­cent­age (25%) of my hold­ings in equi­ties. Starting out, where my bal­ance was lim­it­ed sim­ply because I had only par­tic­i­pat­ed in the pro­gram a short time, it did­n’t make any sense at all. The amount that I could invest along with the high fees asso­ci­at­ed with tak­ing advan­tage of this pro­gram “fea­ture” made it a non-starter.

I guess the counter-argu­ment is that these com­pa­nies need to make mon­ey. If you pay a sin­gle com­mis­sion and nev­er pay anoth­er fee, the com­pa­nies would­n’t be able to ser­vice the com­pa­ny and pro­vide a 401(k) man­age­ment ser­vice.

Maybe. But, these com­pa­nies are the same dis­count bro­ker­ages who allow me exact­ly what I’m ask­ing for in non-401(k) accounts.

Is it that they’re charg­ing busi­ness­es and their employ­ees, because they can? Just like many oth­er B2B sales, it’s often not about the actu­al user of the prod­uct. It’s more about the buy­er and the finance depart­men­t’s met­rics.

I think there’s a lot of “this is the way it’s done” think­ing, com­bined with a fair dose of fear (“peo­ple should­n’t be invest­ing in indi­vid­ual stocks, they have to invest in funds”).

Two com­pa­nies that are real­ly shak­ing things up are Robinhood, who offers free trad­ing, and Betterment, known as a roboad­vi­sor (reduc­ing the cost of ser­vice through automa­tion). Robinhood in par­tic­u­lar is very clear about where they make their mon­ey: they make it in oth­er areas of their busi­ness. Both these com­pa­nies are pur­sue, ing cor­po­rate retire­ment accounts and I wish them tons of luck. They’ll do great.

In fact, I plan to write a review of Robinhood, but until then I have writ­ten a review of Robinhood, let’s just say they’re what a bro­ker­age would be if they designed them­selves for the mobile mil­len­ni­al-as-a-ser­vice mar­ket mind­set. (I mean that as a com­pli­ment.)