Three Lesser-Known But Powerful 401(k) Features

Robert Brokamp (0:03)

A few unique, lesser known features of 401Ks. Today on this Saturday, personal finance edition of the Motley Fool Hidden Gems Investing Podcast.

I'm Robert Brokamp, and before we get into the main topic of today's show, I want to let you know that the last episode of this month will be a Financial Planning Mailbag. So if you have any questions about retirement planning, tax planning, estate planning, college planning, or just about any aspect of personal finances, email them to podcasts at fool.com, and we'll do our best to answer them. That's podcast with an S at fool.com. Now let's move on to 401Ks, because after all, this past Thursday was National 401K Day, which is usually the Friday after Labor Day. But since this past Friday was September 11th, 401K Day was moved to September 10th. Out of respect to September 11th and its own 25th anniversary memorial events. Now, in the May 9th episode of this year, I provided 11 suggestions for maximizing the value of your work-based retirement plan. So I encourage you to go back and listen to that episode if you haven't already. But this episode, I thought I'd focus on a few lesser known or underutilized 401K features. The self-directed brokerage account, the mega backdoor Roth, and the rule of 55 And I'll say upfront that part of the reason you may not hear much about these is that not every 401K offers them.

But as I often point out, if your 401K is lacking features or a robust menu of investments, bring it up to your employer and see if they'd be open to improving your plan. That's what a few of my colleagues and I did at The Motley Fool many years ago. And fortunately, the company's leadership was open towards our suggestions, and perhaps the folks in charge of your company will be too.

All right, let's start with the self-directed brokerage account, which as the name suggests, permits you to buy investments beyond that standard slate of 15 to 25 mutual funds that you'll find in most 401Ks. And this brokerage account could just provide a broader range of mutual funds or even let you buy individual stocks or bonds. About 20% to 30% of 401K plans have this feature, but it's only used by about 1% to 3% of eligible participants. And I think one of the reasons for the low utilization rate is that many participants just don't know about it. So check the features of your plan. You may have more investment choices than you think. One reason that more 401Ks don't offer a self-directed brokerage account may be that plans do have a fiduciary responsibility to provide prudent investments to participants and some plan providers worry that if they let employees choose any investment they want, they may make irresponsible decisions with their retirement money.

As you might expect, we fools believe that investors should have more choices. Plus, the brokerage account doesn't just allow participants to buy individual stocks as well as maybe a wider range of stock funds and ETFs. It also offers more choices for people who want to play it safer with their money. The typical 401K has maybe one cash-like account, maybe two or three bond funds, but there are many other, perhaps better ways, to invest the non-stock portion of your portfolio.

So check to see if your plan offers a self-directed brokerage account. And if not, ask to see if that feature could be added. And if you start utilizing that account, don't do anything crazy, right? Because after all, this is your retirement money.

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