What is a Brokerage Window?
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What is a Brokerage Window?
An increasing number of companies are offering the option of investing 401(k) account assets in a wide range of stocks and funds, way beyond the mutual funds offered since the inception of the 401(k) in the early 80's. Although only 5% to 10% of employers now offer these "self-directed brokerage account windows," many more will follow and that is a fact. These options were traditionally included only in smaller plans of professional firms where most workers were fairly sophisticated investors. The popularity of these options for firms with less than 50 employees has increased sharply from 4.9% in 1992 to 18.3% in 1997.
The concept is simple. In addition to choosing from 6 or 7 pre-selected mutual funds, individuals can now select the brokerage window option. Some employers require minimum account balances of $2,500, but once an account is established, investors manage it as they would any other account - through the brokerage's Web site, automated telephone system, or customer service representative. Annual fees range from $50-$150 a year. Investors also pay commissions of around $25-$29 per trade.
Is this good for you?
Brokerage account windows are not always a good idea for employees of large companies with excellent 401(k) plans. Do your math. Large companies often negotiate lower expenses on mutual funds offered in their retirement plans, but by buying a fund through a window, you'll pay retail prices, which means higher expenses. Also find out all the rules. Although 401(k) participants can buy and sell funds on the same day, brokerage account providers often require that cash be in your account before you are allowed to make a transaction. This may means you have to wait a day between purchases and sales.
Trading costs are not always as low as costs available at some online brokerages. You don't want to make a lot of small purchases with these accounts. With the competition among 401(k) plan providers, it is likely that these commission costs will come down.
There also exists a debate whether the sponsors of self-directed plans will have fiduciary liability. Most likely, the sponsors' fiduciary liability will be limited. Plan participants will be liable for their own investment choices.
Because brokerage windows are part of 401(k) plans, taxes on security gains from these accounts are postponed until the money is withdrawn after retirement. The freedom of choice is a much-welcomed benefit for investors.
You may not have heard of this concept yet, but you will. Factor this information into your current 401(k) plan if available. In the future, most options and plans will be able to be shopped on the Internet so that the consumer can compare and make educated decisions about whether an investment like a 401(k) brokerage account is the right choice. Certainly use this information when considering you next job change or use this to help make your company one of the first companies to take advantage of this opportunity.
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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