You are responsible for managing your own 401(k) plan’s investments, even when your choices are limited to a short menu of mutual funds. Within a mutual fund, of course, you have no say over which securities are bought and sold.

Even if you do have plenty of choices for your 401(k), you may seek the advice of a financial advisor to help you decide where to put your money. That will help, but even with an advisor, you are still limited to your company’s menu of choices. And then, of course, there’s the fact that professional fund managers regularly underperform the market.

All of which increases the temptation for those wise to the ways of the market—you, perhaps?—to choose their 401(k) plan’s self-directed or brokerage window option and take over management of their 401(k) plan themselves. If your company’s plan has this feature, should you choose it?


  • More investment options

  • Higher quality investments

  • Use your own investing acumen


  • Higher fees

  • Labor-intensive research

  • Lack of liquidity/transparency

The Pros of Managing Your Own 401(k) Plan

There are several important factors that could push you in a do-it-yourself direction.

More Choice

With a self-directed plan you have many more investment choices. In addition to mutual funds, your portfolio could include exchange traded funds (ETFs), individual stocks, bonds and even nontraditional options, such as real estate.

“When you go the self-directed route, you are no longer tied to the 15-18 set investment options of your 401(k) plan,” says John P. Daly, CFP®, president, Daly Investment Management, LLC, in Mount Prospect, Ill. “You can purchase just about any stock, ETF, or mutual fund available on the custodian’s platform. This can be very beneficial, especially if your plan has limited investment options or low quality investment options.” 


Instead of a limited number of mutual funds (some of which may have been poorly chosen), a brokerage window offers a wider array of choices, allowing you to be more discriminating.


If you have investing knowledge and skill, you can put it to use by managing your own investments. This can be a real plus when you consider the limited number of choices a traditional 401(k) typically offers.


If you’re a disciplined investor, not susceptible to investing on a whim or panic, you can take better advantage of the opportunities available in a self-directed 401(k) than a mutual fund managed by someone else.

Nontraditional Investment Options

With a self-directed 401(k), you can consider real estate and other nontraditional investments that could potentially provide extraordinary earning opportunities. These options aren’t available to regular 401(k) investors.

If you choose to have a self-directed 401(k), it’s imperative that you know the IRS regulations about which investments are not allowed.

The Cons

There is, of course, a downside to making your own investments.


Along with the plethora of choices you have under a self-directed 401(k) option come IRS regulations barring you from certain types of investments. If you don’t know those regulations, you could be in trouble. Making a prohibited investment can result in allowing all of your investments to be subject to tax.


For most investors who handle their own investments—outside of mutual funds—fees tend to be higher. If you trade too frequently, the fees associated with trading can wipe out most, if not all, of your gains.


Even if you have a decent grasp of your options, a simple lack of experience can cause you to miss nuances a manager or financial advisor might have caught. Ultimately, if things go south, there will be nobody besides yourself to blame. Remember: There are no mulligans in investing.

“The biggest bonus to having a self-directed option is the ability to control the expense ratios within each individual investment,” says David S. Hunter, CFP®, president of Horizons Wealth Management, Inc., in Asheville, N.C. “However, this opens up thousands of investment options, and there is always the chance that an investor will be paralyzed by options and may not participate as much as one would with a set-it-and-forget-it 401(k)plan.”


Expertise and discipline aside, investing takes time. Make sure you have enough of it to properly stay up to date on financial news and what you need to know about companies in which you plan to invest. 

Lack of Liquidity/Transparency

Some of those nontraditional investments to which you now have access lack transparency and liquidity. This means you may not be able to move in or out as quickly as you like, and you may have trouble obtaining a clear understanding of your exposure—unlike with stocks and bonds.

“The downside of managing your own 401(k), beyond the additional fees, is you potentially becoming your own worst enemy,” says Mark Hebner, founder and president of Index Fund Advisors, Inc., in Irvine, Calif., and author of "Index Funds: The 12-Step Recovery Program for Active Investors.” “Many investors who do not work with a professional wealth advisor often allow short-term market movements to dictate their long-term investment strategy. This approach can potentially cause disastrous long-term effects during very turbulent times.”

Self-Directed 401(k) vs. Self-Directed IRA

In addition to the self-directed 401(k), the IRS also provides the option of a self-directed IRA. The pros and cons are similar. One major difference is the contributions limit: It is higher for a self-directed 401(k).

In addition, self-directed 401(k) plans allow loans. It’s possible to get loans with a self-directed IRA, but they’re much more difficult to obtain. Finally, you do not need to hire a custodian for a self-directed 401(k). However, IRAs require a trustee.

The Bottom Line

A look at the pros and cons listed above makes it clear that managing your own investments is not for the faint of heart. Nor is it for the uninformed or someone too busy to do research.

“Although managing your self-directed 401(k) may seem like a great idea, the lack of research and professional advice along with other potential roadblocks, such as higher fees, lack of transparency, and complex IRS rules, can become a problem,” says Carlos Dias Jr., founder and wealth manager of Excel Tax & Wealth Group in Lake Mary, Fla.

Knowing yourself, your tolerance for risk, your knowledge of investing, and your ability to maintain composure and discipline are key. If you do decide to go it alone, learn about the tools available to help make it easier for you to manage your own investing.