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.
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.)