Brokerage Window

What Is a Brokerage Window?

A brokerage window is an option offered in a 401k 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 401k 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 401k investing.

Brokerage windows are an option associated with a firm’s 401k 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 401k benefit plan.

Brokerage Window Considerations

Notably, 401k 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 401k plans far beyond just a few listed investments, giving a 401k investor 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 401k 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. Brokerage windows can also incur high fees. Most brokerage window accounts will require an annual account maintenance fee of approximately $50.

Brokerage windows may also have higher than average trading costs, with some brokerage windows reporting transaction fees of $8 to $10 per trade. Thus, investors should do thorough due diligence on the fee structures of brokerage window accounts in comparison to standard options available in the market.

Many 401k plans focus on institutional shares of listed options that have much lower expenses than their retail counterpart. These can be good core investments for the holdings of a 401k 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.

Article Sources

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  1. Nasdaq. “A 401(k) Self-Directed Brokerage Option Can Be Your Best Friend.”

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

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

  4. Municipal Employees’ Retirement System of Michigan. “The Self-Directed Brokerage Account.”

  5. Department of Labor. “Understanding Brokerage Windows in Self-Directed Retirement Plans.” Page 15.

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