Defined contribution plans are adding self-directed brokerage accounts as a way of giving participants more choices even as some plans reduce the number of core investment options.

Among those making the move: Sprint Nextel Corp.. which began offering a brokerage option for its $2 billion 401(k) plan in October; Stanford University. whose $3.6 billion 403(b) plan’s window opened in November; Hawaii’s $1.45 billion 457 plan, which launched its self-directed brokerage operation in April; and the Ohio Public Employees Retirement System. which will offer the option in its $373 million 401(a) plan next spring.

DC plan executives want more simplicity in the core offerings, and the window has become an outlet for people who might be unhappy with the changes or who want more choices, said Pam Hess, director of retirement research at Hewitt Associates LLC. Lincolnshire, Ill.

Hewitt research shows a steady rise in the use of self-directed brokerage windows. Tracking results every two years since 2001, Hewitt found the percentage rose steadily from 12% in 2001 to 26% in 2009 among midsize and large companies. In 2009, the survey of 285 Hewitt and non-Hewitt clients showed self-directed brokerage accounts represented 3% of assets in plans in which the option was available.

The primary drivers are the participants with the highest income and highest account balances and the longest tenures, said Stacy Schaus, senior vice president for defined contribution practice at Pacific Investment Management Co. Newport Beach, Calif. People who use it are typically working with a financial adviser.

Her comments are supported by a 2010 Hewitt survey that shows higher salaries were linked to higher participation in self-directed brokerage accounts. That survey showed 10.4% of participants earning more than $100,000 annually used the option in 2009, compared with 1.5% of those earning $20,000 to $39,000 a year.

Some self-directed brokerage accounts are restricted to mutual funds; others allow participants to invest in individual stocks and bonds, as well as mutual funds and exchange-traded funds.

This gives sophisticated investors more options than are available in a typical DC plan, said Ryan Alfred, president and co-founder of BrightScope Inc. San Diego, which rates 401(k) plans. The accounts also can mollify that small group of vocal investors in any plan who chafe at what they claim are limited choices, he said.

Some plans charge an annual administrative fee to window users, and users pay all transaction costs. All expenses are paid from account balances.

Plan officials must emphasize to participants that the transaction costs incurred by the relative few using the brokerage option won’t be borne by everyone else, said Ken Etheredge, senior vice president and retirement plans practice leader for BOK Financial. Tulsa, Okla. which sets up self-directed brokerage accounts. You can’t pass that cost to other participants, he said.

Full understanding

When BOK Financial establishes a self-directed brokerage account for a client, it makes sure participants sign an agreement saying they understand the fees as well as the risks and the limits on their investments, Mr. Etheredge said.

You have to acknowledge that you understand when you step outside the house of the 401(k) and into the window of the self-directed brokerage, agreed Maxine Sandman, manager of investment analysis at Sprint Nextel Corp.. Overland Park, Kan.

The self-directed option accounts for less than 1% of the company’s 401(k) plan assets, she said. It was an opportunity to give a choice to participants who were interested in funds that were not appropriate for the general employee population, said Ms. Sandman, referring to sector funds. Sprint Nextel participants can invest in mutual funds and ETFs.

Installing the brokerage window was part of a restructuring that included shifting to target-date funds from risk-based ones, offering more passive funds and reducing investment options to 20 from 28. We wanted to simplify to make it easier to educate participants, said Ms. Sandman.

Officials eschewed making stocks available because of the risk of the participant’s portfolio becoming non-diversified, she said.

At Stanford University. Palo Alto, Calif. launching the brokerage window also was done in conjunction with a restructuring. Stanford officials reduced the number of mutual funds in its 403(b) plan to five core funds and a series of target-date funds from 295, said Leslie Schlaegel, associate vice president for benefits.

The previous investment lineup was too confusing for participants, he said. The brokerage option gives participants access to more than 4,500 mutual funds. By regulation, 403(b) plans can only offer mutual funds. no individual stocks, he said.

About 17% of plan assets are invested through the self-directed brokerage option, Mr. Schlaegel said.

Hawaii’s deferred compensation plan allows brokerage window users to invest in stocks, bonds and mutual funds, Cynthia Akiyoshi, personnel management specialist for benefits administration in Hawaii’s Department of Human Resources Development, Honolulu, said in an e-mail response to questions.

Over the years, the plan’s board of trustees received inquiries from plan participants on including various types of investment options, so the board decided to expand the choices of investment options, she wrote.

Less than 1% of plan assets are invested through the brokerage window, she said.

Diversified portfolio

At the Ohio Public Employees Retirement System. Columbus, we wanted a diversified portfolio, so the plan’s brokerage option will offer mutual funds and not stocks, said John C. Lane, director of investments.

Eric Sanderson, the system’s defined contribution plan manager, said the brokerage account option will be available in the spring. Participants must have at least $5,000 in plan assets, and the brokerage account can hold only 50% of a participant’s assets. Mr. Sanderson expects the option to feature 6,000 to 12,000 mutual funds.

Meanwhile, executives at other plans are opening the brokerage window even wider.

When the $1.7 billion Southwest Airline Pilots Retirement Savings Plan, Dallas, started a self-directed brokerage account 20 years ago, participants could place 25% of their assets in it, said Richard Doherty, benefits director and 401(k) administrator. In January, the limit was raised to 95% as part of the pilots’ collective bargaining agreement with Southwest Airlines Co.

The company was concerned (about raising the limit), but we showed them that no one was day-trading over the last 10 years, Mr. Doherty said. Pilots can invest in stocks, bonds and mutual funds, but they can’t trade in master limited partnerships or penny stocks, he said.

About 10% of plan assets are in the brokerage option and about 20% of participants use the option.

The pilots here hope to have a 30-year career, said Mr. Doherty. Having better retirement choices takes pressure off wages.

Southwest Airlines officials also are looking at a similar product for the company’s $2 billion 401(k) plan, said June Jackson, manager of retirement benefits. She declined to elaborate.