Brokerage Accounts

If your 401(k) plan offers a brokerage account, sometimes called a brokerage window, you can invest in stocks, bonds, mutual funds or other investments the brokerage firm handling the account offers. You give buy and sell orders just as you do with a regular, taxable account.

Advocates of this approach think that having the greatest possible choice is the way to allow experienced investors the opportunity to realize the largest possible return on their retirement savings. And because the entire account is tax-deferred, if you sell a stock or bond you’ve purchased through a 401(k) brokerage account for more than you paid, you owe no capital gains tax on the profit—though you will owe income tax when you withdraw from your account.

The Downside

Others worry that having unlimited choice may be confusing or intimidating, and that employees may not have enough information to make wise choices. However, in most cases, plans offer a menu of funds from which you can choose as well as the brokerage window.

In addition, critics argue that investing through a brokerage window might encourage participants to buy and sell frequently, trying to beat the market. This practice, known as day trading or market timing, is at odds with the long-term goals of a retirement savings plan.

The Cost of Flexibility

A 401(k) brokerage account has an annual fee—anywhere from $25 to $175—depending on the brokerage firm the plan uses. There may also be transaction costs and commissions on each trade you make through the account. You may also pay higher fees on mutual funds you buy through the account than on funds that are part of a plan menu.