A lot of employers give you a list of mutual funds to choose from, which have limited performance. The employer is attempting to protect employees, but in actuality they are hurting employee’s future returns. With a brokerage window an employee can choose from mutual funds, stocks, ETFS and other instruments that are not restricted to the list provided by the employer…Hence, an employee can increase the diversification of the 401k while incurring fewer fees especially if ETFs are used over mutual funds.
However, here is the catch: some employers tag on annual fees for brokerage windows…and then you have transaction fees you would have to incur ever so often (please don’t day trade!). Also, a brokerage window is usually only offered to high income employees as they can recover from a mistake much easier.
I only recommend brokerage windows for savvy investors as it has great benefits especially if your employers fund list is missing sectors and ETFs. Now if you are novice investor your best bet is to ask your employer to add additional funds or ETFs that cover more sectors. Also, You do not have to use 100% of your 401k for the brokerage window as employers still can provide good deals on some funds and of course deals on the employers own stock. How can you become a savvy investor and be able to make informed decisions about your 401k and money in general?....check out the book ( http://www.iceberggem.com/p/book.html ) here at IceBergGem so you can learn how to valuate investment vehicles beyond going with what ya know.
And at the end of the day....even if you can only tuck away 1% of your salary never pass up a 401k as the return is higher than a traditional savings account even with fees. Plus you have free money coming from the employer as a contribution match. No need to abandon a 401k for an IRA…just ask for control of the funds or more options once you reach a level of comfort with investment instruments.
