Tom Explains Options and Advises Careful Planning
Transcript:
Katie Nealis:
Why do 401k and employer plans have limited investment availability as investment choices?
Tom Vaughan:
Yeah, it’s very fascinating because that’s one of the big problems with 401 Ks is that limited availability. So let’s say, like I just showed you, the vanguard, you know, financial index, or the vanguard, you know, materials index, you know, doing so well, I’ve never seen those inside of a 401k. So if you wanted to, like buy those particular indexes, you can’t. And it really has a lot to do with just the logistics, the way that it’s set up. So there’s usually an administrator, and they’ll only allow, you know, 20, or 30, you know, different funds or ETFs to choose from.
And it’s really kind of an administration piece. But what has happened, and I believe this was brought on by some suits, against 401k providers, they have a lot of companies that you should check with yours now allow you to do what’s called a self directed 401k. Or you can go out and open up a essentially a brokerage account and buy anything that you want, it’s a bit more complicated, a little bit harder to do, you have to know what to buy, but you can buy anything, any stock, any bond, any ETF any mutual fund, because it’s just a regular brokerage account that is through your company. And those are, those are becoming more and more popular, I have quite a few clients that have set those up now. And I think that’s a better way to go personally.
Easan Arulanantham:
Do you think there’s major risks with uh, you know, having a self directed 401k versus having one that you have a plan administrator helping you out? Kind of, because they are required to tell you help you figure out your investments?
Tom Vaughan:
Yeah, definitely. I mean, you have to kind of know what you’re doing. As far as that goes, theoretically, that list that they’ve chosen will eliminate some of the really crazy things, you know, because on your own, you can go by, you know, any of these, you know, really wild stocks and those types of things and end up losing, you know, tons of money. And so that is the aspect that would be the negative is just you have to be able to control that risk.
I manage a lot of the 401 K’s that my clients have in those brokerage so we can kind of manage risk together that way. And that might not be a bad idea is to find somebody to help you if you want to go that direction. But yeah, no, that is an aspect of it. That is part of that, although, honestly, even in a 401k that’s got a curated list of 20 holdings. When you know, in 2008 when everything fell apart, people still lost plenty of money. I mean, you still could be down 50% pretty easily. So you kind of have to know what you’re doing even inside that 401k