Self Directed 401k Plans - Risks And Counter Measures

Self-directed 401k's are retirement plans that allow plan participants to have Self-Directed Brokerage Accounts (or SDBA's). Unlike traditional, employer-sponsored retirement plans, self-directed 401k plans bring to participants/retirees great many investment options. All you need to do is open an account with a brokerage firm and then you will be able to enjoy a wider selection of investment options, including individual stocks and bonds.

Of course, participants are not just allowed to make unlimited investments in these self-directed brokerage accounts. Participants can invest only a fraction of their retirement assets - say a fixed percentage or a maximum dollar amount.

Self-directed 401k Plans - Associated Risks

Every employee has the right to ask for self-directed accounts when making retirement planning. More and more employers are now thinking of adding self-directed accounts even if it is not included in their retirement plans.

Having said this, it would be wise to point out that researches have indicated that careful, experienced investors, who capably plan their investments, should only go for self-directed 401k plans. Actually, self-directed 401k's and SDBA's can prove risky for both employers and employees.

Speaking of employees, it must be noted that self-directed 401k's bring on them added investment responsibilities. With large number of investment choices, the going gets tough for most investors; they feel rather confused and overwhelmed. In many cases, this results in the investor making a wrong choice and making a bad investment.

The above situation may turn risky for the employer too, especially if the employee continues to make bad investments, without even trying to comprehend the consequences. Under such circumstances, the company (i.e., the employer) is usually held responsible for not guiding the employee in investment matters. In acute cases, lawsuits are filed against companies for failing to provide employee-participants with adequate information.

What Is The Way Out?

Both employees and employers can join hands to evade such knotty situations. For this, it is nearly binding on companies/employers that they thoroughly educate their employees in matters of investment as well as about the associated risks. Investors/employees too should take upon themselves to sharpen their investing acumen.

Novice players should tread more carefully and it is best for them to stick to some company-selected funds initially. Once the person is familiar with the investment-game and is able to work out his/her own strategy, it will be apt for the person to go for self-directed 401k plans.

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Nick Blackman