Managing Your Own 401(k): The Pros and Cons

You have more choices and potential, but greater risks of messing up

Participants in 401(k) plans might feel restricted by the narrow slate of mutual fund offerings available to them. And within individual funds, investors have zero control to choose the underlying stocks, which are selected by the mutual fund managers, who regularly underperform the market.

Fortunately, many company's offer self-directed or brokerage window functions that give investors the option to seize the reigns over their own financial destinies by managing their 401(k) plans for themselves. But there are both pros and cons to taking the do-it-yourself route.

Key Takeaways

  • Many companies offer self-directed or brokerage window functions that allow for self-managed 401(k) plans.
  • Self-directed plans provide access to a wider swath of investments, including non-traditional assets like real estate.
  • The broader investment choices may invite unforeseen tax consequences.

The Pros of Managing Your Own 401(k) Plan

  • More investment options

  • Higher quality investments

  • Use your own investing acumen

  • Higher fees

  • Labor-intensive research

  • Lack of liquidity/transparency

More Choice

Self-directed plans offer more investment choices. In addition to mutual funds, portfolios may include exchange traded funds (ETFs), individual stocks and bonds, plus non-traditional assets like 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, brokerage windows offer a substantially wider array of choices, letting investors be more discriminating in their selection process.


Those with investment knowledge and skill can put their experience to the test. This can be a major advantage to traditional 401(k) management.


Disciplined investors who maintain their composures during market volatility can exploit opportunities available in a self-directed 401(k). This gives them a leg up over mutual funds managed by someone else.

Non-Traditional Investment Options

Self-directed 401(k) investors can incorporate real estate assets and other non-traditional investments into their portfolios, which can potentially provide extraordinary earning opportunities. These options aren’t available to regular 401(k) investors.

The Cons

There are many potential downsides to managing your own investments.


Among the plethora of choices available under self-directed 401(k)s, some will inevitably be off-limits due to regulations from the Internal Revenue Service (IRS), which prohibits certain types of investments. Those unfamiliar with these regulations may run into trouble and encounter severe tax consequences, as a result.


Self-investors who stray beyond mutual funds, or who trade stocks too frequently may find themselves saddled with exorbitant fees that can potentially wipe out most—if not all, of their gains.

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.


Less experienced investors may miss nuances that a professional manager and a financial advisor will catch.

"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 Asheville, N.C.-based Horizons Wealth Management, Inc. “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.”

Lack of Liquidity and Transparency

Some non-traditional investments lack transparency and liquidity, which may restrict investors from easily buying and selling their positions. This can be a rude awakening to those accustomed to the ease of dealing with traditional 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," Hebner adds. "This approach can potentially cause disastrous long-term effects during very turbulent times.”

Investors in self-directed plans should be sure to diversify their stock holdings, to build downside risk protection into their portfolios.

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 vastly higher contribution limit with self-directed 401(k)s.

Secondly, self-directed 401(k) plans allow loans, although they may be difficult to obtain. Finally, IRAs require a trustee.

Lastly, if you're into trading derivatives, such as equity options, regulations prohibit those types of transactions in a 401(k), but they are permissible, with certain restrictions, in a self-directed IRA.

The Bottom Line

Managing their own portfolios may afford investors a broader array of investment options. But there are also added complexities when it comes to fees, liquidity, and other elements. Those who take the self-directed plunge should take the time to learn the tools available to help smooth out the process.

Article Sources
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  1. Internal Revenue Service. "Retirement Plan Investments FAQs."

  2. Internal Revenue Service. "Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits."

  3. Internal Revenue Service. "Retirement Topics - IRA Contribution Limits."

  4. Internal Revenue Service. "Retirement Plans FAQs Regarding Loans."

  5. U.S. Securities and Exchange Commission. "Investor Alert: Self-Directed IRAs and the Risk of Fraud."

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