No matter which type of 401(k) plan you have, you are responsible for your 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. (For more, see The Rise of 401(k) Brokerage Accounts.) If your company's plan has this feature, should you choose it?


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 non-traditional 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.” 

Quality. 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.

Experience. 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.

Discipline. If you’re a disciplined investor and not subject 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. (For more, see The Importance of Trading Psychology and Discipline.)

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


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

Rules. 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. (For more, see 5 Investments You Can't Hold in an IRA/Qualified Plan.)

Fees. 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.

Novices Beware. 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 adviser may not. Ultimately, if things go south there will be nobody besides yourself to blame. Remember: There are no mulligans in investing. (For more, see: Learn to Invest in 10 Steps.)

“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.”

Research. 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 non-traditional 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 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. (For more, see Self-Directed IRA: The Right Move for You?)

The Bottom Line

A look at the pros and cons listed above makes it clear managing your own investments is not for the faint of heart. Nor is it for the uninformed. Nor is it for someone too busy to do real 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. For a real in-depth look, read Investopedia's tutorial Become Your Own Financial Advisor.