by Harry Sit on March 5, 2012 15 Comments

401k plans are slowly getting better. My plan added a low-cost collective trust. My wifes plan added a self-directed brokerage account, also known as a brokerage window. Her plan is managed by Fidelity. Fidelity calls it BrokerageLink.

Some 401k plans managed by Charles Schwab also have this feature. Schwab calls it PCRA Personal Choice Retirement Account.

How Does It Work?

Fidelity BrokerageLink is listed in the plans investment options just like another fund. She can designate a percentage of her ongoing payroll deductions toward it. She can transfer money between it and other funds. She can rebalance her plan account by saying what percentage of the total plan account should be in BrokerageLink.

Inside BrokerageLink, its just like a regular brokerage account, with its own account number. You can buy or sell pretty much everything you can with a regular brokerage account.

The link that connects BrokerageLink to other funds in the plan is a money market fund. Money going into or coming out of the brokerage account is put into or taken from the money market fund. From there, you place trades to buy or sell other mutual funds, ETFs, individual stocks and bonds, etc. This is similar to how Vanguard Brokerage Service works.

Because its a two-step process, its too much trouble to put a percentage of the ongoing payroll deductions into BrokerageLink and place trades twice a month. Instead, its easier to still put the ongoing payroll deductions into core funds. Transfer a chunk to BrokerageLink after the money builds up to a larger sum.

Fees

Other 401k providers often charge a high annual maintenance fee and high trading commissions for the self-directed brokerage account. A fee of $100 to $200 per year is quite common. Fidelity doesnt do that. Its BrokerageLink has the same low prices as its retail brokerage accounts. There is no annual fee. Commissions are the same as retail:

• Fidelity funds: free
• Treasury bonds: free
• new-issue brokered CDs: free
• select iShares ETFs: free
• Vanguard ETFs: $8 a trade

The brokerage window opens up a world of good investment options. Prior to adding Fidelity BrokerageLink, my wifes plan only offers two index funds: an S&P 500 fund and a US bond index fund. With Fidelity BrokerageLink, she will have many good options. Im showing some of the best options here.

Spartan Index Funds

Fidelitys Spartan index funds are its answer to low-cost index funds from Vanguard. There arent as many as at Vanguard, but if you are limited to Fidelity, there are enough good choices. Notable ones include:

There are some newer Spartan index funds, but they are still too new for me to consider at this time.

iShares ETFs

Fidelity has a joint marketing deal with iShares to make 30 iShares ETFs commission-free at Fidelity. iShares ETFs arent as cheap as Vanguards but they are good enough. If you purchase often, the lack of commissions will make up for the slightly higher annual expenses. Some notable ones include:

Vanguard ETFs

Vanguard ETFs will cost a $8 commission per trade in BrokerageLink. Its best if you transfer a chunk to the brokerage window, buy in one trade, and then hold them and select free dividend reinvestment. If you buy a large chunk, paying a one-time commission is better than paying a higher expense ratio every year to a similar iShares ETF. Some notable ones include:

With all these great investment options, Fidelity BrokerageLink makes a big difference to an average 401k plan.