Brokerage Window

What Is a Brokerage Window?

A brokerage window is an option offered in a 401(k) plan that gives the investor the capability to buy and sell investment securities on their own through a brokerage platform.

It may also be known as a "self-directed option" or a "self-directed brokerage option."

Key Takeaways

  • In 401(k) retirement plans, a brokerage window is a facility allowing plan participants to buy and sell securities through a brokerage platform.
  • Having a brokerage window allows plan participants to invest in a far wider range of investments than the typical menu of limited mutual funds offered by plans directly.
  • A plan sponsor (e.g., employer) must elect this option and it is the responsibility of plan participants to find and learn how to use the platform, which is typically online.
  • If you use the brokerage window, note that this exposes you to additional fees and commissions when you trade and can lead to riskier portfolios if savers do not diversify.

Understanding Brokerage Windows

The brokerage window is a relatively new convention for 401(k) plans, but it is quickly gaining popularity as more companies give the option to their employees. While the use of a brokerage window may not interest some investors, it can certainly be a viable option for those who wish to have more flexibility in their 401(k) investing.

Brokerage windows are an option associated with a firm’s 401(k) plan and must be integrated by the plan sponsor for use. Many investors may not be aware of brokerage windows or may have overlooked the offering in their 401(k) benefit plan.

While more 401(k) plans are offering brokerage windows, few investors use them. Data from Fidelity Investments indicates that less than 3% of investors with access to a brokerage window use it. Those who do invest in a brokerage window tend to be older, higher-salaried, and have more assets to invest.

Special Considerations

Notably, 401(k) plans offering brokerage windows are likely to provide fewer options for their investors. While investors may have fewer standard offerings to choose from, a brokerage window opens the investable market to nearly all publicly traded investments. Brokerage windows are generally administered by leading discount trading platforms and offer investors the same options for trading a listed security that they would receive with a brokerage account.

With a brokerage window, investors can choose from a full range of exchange-traded funds and mutual funds as well as individual stocks, bonds, and other publicly traded securities. Therefore, brokerage window options expand the investable universe for 401(k) plans far beyond just a few listed investments, giving investors the flexibility to invest pre-tax savings into nearly any investment on the market.

Note that 401(k) plan participants are responsible for any trading costs, advisor fees, or commissions generated using a self-directed plan.

Brokerage Window Limitations

Since brokerage windows work within the portfolio of a 401(k) plan, each may have its own parameters defined by the plan sponsor. Some companies may limit the choices offered through the brokerage window to a select few.

There may also be fees for using a brokerage window, although these costs appear to have fallen due to the prevalence of no-fee trading. A 2021 report to the Secretary of Labor by the ERISA Advisory Council found that a $50 annual fee is typical for those brokers that charge a fee, and many brokers do not. Moreover, record keepers—the companies that track plan assets—may charge additional fees, although the majority offer online trading "at little or no cost."

Because each plan is different, investors should do thorough due diligence on the fee structures of brokerage window accounts in comparison to standard options available in the market.

Many plans focus on institutional shares of listed options that have much lower expenses than their retail counterparts. These can be good core investments for the holdings of a 401(k) portfolio, but venturing into other options such as a brokerage window may have fees that make standard brokerage accounts outside of the plan a better way to invest in a broadly diversified portfolio.

What Are the Fees for a Brokerage Window?

The fees for a brokerage window will depend on the exact terms set by the companies that sponsor and administer the plan. A report by the ERISA Advisory Council found that a $50 annual fee is common among those brokers that charge a fee for using a brokerage window, although some brokers do not charge a fee. There may be additional transaction fees or fees for record keeping. It is important for investors to read their plan documents thoroughly so that they know what fees and charges to expect.

How Do I Open a Brokerage Window in my 401(k)?

Not all retirement plans offer a brokerage window, and this option is up to the plan administrators. If a 401(k) plan does offer a brokerage window, the investor will first need to read and sign various disclosures indicating that they understand the risks and costs involved.

Can You Day-Trade Your 401(k)?

It is possible to day-trade with a 401(k) plan, thereby avoiding some of the tax penalties associated with trading on an ordinary brokerage account. However, your plan may place limits on the size and frequency of trades. Moreover, 401(k) plans are still subject to withdrawal penalties.

Article Sources
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  1. Morgan Lewis. “Self-Directed Brokerage Windows in 401(k) Plans: Do Fiduciaries Have to Look Inside?

  2. U.S. Department of Labor. "Understanding Brokerage Windows in Self-Directed Retirement Plans," Page 32.

  3. U.S. Department of Labor. “Understanding Brokerage Windows in Self-Directed Retirement Plans,” Page 21.

  4. U.S. Department of Labor. "Understanding Brokerage Windows in Self-Directed Retirement Plans," Pages 15 and 19.

  5. Zacks Finance. "Can You Invest a 401(k) Plan in Day-Trading?"

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