Historically, 401k’s have been great for saving, but SUCK for investing…
…until now.
How investing your 401k used to work
HR works with an investment manager to pick out some mutual funds for your 401k.
That investment manager picks funds that will pay him the most fees (called pay-to-play).
And then – lucky you! – you get to pick from a handful of lousy (and expensive!) mutual funds.
Hooray!
It’s gotten better, but it’s still not great
Thankfully things have improved over the last 10 years.
More and more 401k’s moved away from pay-to-play funds and are offering low-cost, index funds. Yay!
Unfortunately, they still don’t offer enough “ingredients” to make a proper “investment recipe.” Boo!
Most 401k’s also offer target date funds to make it easier to invest correctly…sorta. Yay! (Target date funds are the ones where you pick your retirement year.)
Unfortunately, those target date funds are still pretty lousy investments. Boo!
It’s all gone self-directed!
So even though it’s gotten better, 401k investing has still basically been like swiping right on the “least ugly” option… until now!
Self-directed 401k’s have recently become a pretty standard offering.
So what is it and why am I so excited about it?
If your company offers a self-directed 401k, then you no longer have to choose from a basket of ugly mutual funds.
Instead you can put together a professional-grade “investment recipe” and invest in any mutual fund or ETF you want to.
That means your 401k can now be great for saving AND great for investing!
What to do about it
The first step is to figure out if your 401k offers it. (Amazon, Facebook & Salesforce all do!)
Each 401k calls it something different, but the most popular one by Fidelity is called “BrokerageLink”.
And then if your 401k is up on the trend, then work with your financial planner to sign up for it and invest in a proper portfolio allocation.
Why it matters
Even just an extra 1% per year adds up – either saved from reducing expenses or made from investing correctly.
If you max out your 401k every year, an extra 1% could be worth an extra $700,000 after 30 years.
So run, don’t walk to log into your 401k and see if it offers a self-directed 401k option!
