Can I Manage My Own 401k?

Managing your own 401(k) account can be beneficial or disastrous depending on how you choose to invest, but it gives you complete control over your future.

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Managing your own 401(k) account can be beneficial or disastrous depending on how you choose to invest, but it gives you complete control over your future.

Some 401(k) plans have more investment options than others, but most have a pretty limited selection of investment opportunities. That is why more and more people are starting to wonder whether they can manage their own 401(k) instead of being limited to the few available options. Although you can manage your 401(k) in some cases, you’ll soon learn about whether or not you really should.

If your employer offers a self-directed 401(k) option, then yes you can manage your own 401(k) account. If they don’t you will need to choose from the available investment options and rely on a fund manager or market index funds to manage your account.

Over years, we’ve seen all different kinds of 401(k) plans as well as the different investment avenues that employers have offered along the way. We’ve dealt with actively managed 401(k) plans, passively managed plans, and also of course self-directed accounts. Everything you read here is from hands-on experience in the industry, so let’s dive right in!

Table of Contents

What Options do 401(k) Plans Have?

While some 401(k) plans do allow you to manage your own account — more on that later — the majority of them do not. And most 401(k) plans between companies all around the country have similar investment options for their employees to choose from. While there will of course be some differences from company to company, it is common for many of the same investment options to pop up no matter who you’re working for.

In most 401(k) plans, you’ll have the option of investing into five main asset categories. These categories include U.S. large cap, U.S. small cap, international markets, emerging markets, and bond allocations. Large and small cap funds refer to the market capitalization of the companies within. For example, the S&P 500 Index comprises the 500 largest companies in the United States. So a fund that mimics the S&P 500 would be an example of a large cap fund.

While these options are good for most average investors, there isn’t a whole lot of variety in what you can invest in. And you won’t really have any chance of beating the overall market as you work towards retirement. So before we get into managing your own account, let’s learn about how 401(k) accounts are usually managed.

Who Typically Manages a 401(k)?

As employer-sponsored retirement plans, managing a 401(k) typically resides with the employer. The CEO of the company will not usually be managing or administering the plan themselves, so then starts the train of delegation until it gets down to who is actually managing the 401(k) in the end.

When it comes down to it, the 401(k) is the responsibility of the named fiduciary. This fiduciary is given that responsibility from the employer and becomes the plan administrator. The fiduciary can then further delegate or outsource some of the tasks necessary to manage the 401(k) for all plan participants. But no matter who those responsibilities are further delegated to, in the end, it comes down to the named fiduciary.

So now that we have an idea of what a 401(k) is and who is usually in charge of managing it, let’s take a look at other potential options out there. Can you manage your own 401(k)?

Can I Manage My Own 401(k)?

Since 401(k) plans are employer-sponsored, it will typically be up to your employer whether you can manage your own 401(k) account or not. In recent years, employers have become more and more willing to allow their employees to do this and started offering what is known as a self-directed 401(k). Also known as a brokerage window, a self-directed 401(k) plan allows employees to buy and sell investment securities however they see fit.

As of now, about 20% of companies around the country have adopted this option and added it to their 401(k) plans. That of course then means that about 80% of companies do not offer this option to their employees. So more often than not, you will not be able to manage your 401(k), unless you work for one of the companies that provide you with that option.

But if you’re hoping that it will become an option in the future, keep your hopes up. This is becoming more common and in the relatively near future, most companies will likely start offering this to their employees. This will not only potentially benefit employees like yourself, but also the employers as you’ll learn about shortly.

Should I Manage My Own 401(k)?

So while you might be able to manage your own 401(k) depending on what options your employer offers, the question then becomes whether or not you should. Let’s take a look at some of the advantages and disadvantages of managing your own 401(k) account.

What Are the Benefits of Managing My Own 401(k)?

More Control

The biggest benefit of managing your 401(k) is the additional amount of control you have over your own retirement account. People all over the country dislike the idea of funding their 401(k) accounts only to have little to no control over how their retirement will grow over time.

After selecting their fund allocations in the few options that are offered, there isn’t really much else people can do within their 401(k). With a self-directed 401(k), you have complete control over how your money is invested and how it will grow for your future.

Potentially Better Investment Options

This goes hand in hand with having more control, but in a self-directed 401(k), you have access to any investment vessel that you like. Not only are you limited to very few options in a 401(k), within those broad categories (large cap, small cap, etc.) you are even further limited.

Just within those main categories alone, there are endless funds on the market that you can invest in within a self-directed 401(k). Not would you just be limited to a general small cap fund, for example, but you could then go a layer deeper and pick a specific niche. Maybe you like a small cap innovation fund or solar energy fund. In a self-directed 401(k) you’d be able to choose whatever investment you like.

Ability to Beat the Market

This last benefit then goes together with better investment options, the ability to actually beat the market. As mentioned earlier, a large cap fund within a normal 401(k) will typically follow the S&P 500 Index. While this has been an incredible index over time without a doubt, other funds regularly outperform the S&P 500.

With a lot of research and time spent looking into potential funds to outperform the S&P 500 — and therefore the overall market in general — you can get better returns in your 401(k). Beating the market means your money will grow faster and therefore you’ll have more money in the future. Or you could even end up retiring early!

Are There Any Downsides to Managing My Own 401(k)?

Additional Fees

One of the often-overlooked benefits of a regular 401(k) is that the employer covers most of the fees within the account. As an employer-sponsored plan, there is usually no administration fee that you have to pay and any trade commissions are also covered by your employer. In a self-directed 401(k), you will not have the luxury of everything being covered for you.

Commonly with self-directed 401(k) plans, your employer will charge a fee for you to use the service. This could be up to $100 per year or more. You will also need to cover any trade fees or commissions within the account since you’re managing it yourself, which will really add up over time.

This is why it’s in employers’ best interest to start offering these accounts to their employees, and why it’s likely to become more and more common in the near future. It saves them money!

Inexperience Leading to Poor Performance

Then there is always the chance — and a decent chance — that your investment choices could underperform the market or a fund manager in the long run. Fund managers and management teams do that for a living and most people cannot consistently outperform professional fund managers.

Even so, most fund managers will not even outperform the general market as a whole consistently. So while having the extra control in your 401(k) might sound like a great option, keep in mind that it could always end up worse for you than just leaving it up to your employer and their plan administrator to get the best possible returns.

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