Unlocking Investment Potentials With 401(k) Brokerage Link Accounts

Apr 23, 2024 | 401K, 403B, ETFs, Investing, Investments, Mutual-Funds, Newsletter

Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA, and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Wednesday, May 1, 2024. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Unlocking Investment Potentials With 401(k) Brokerage Link Accounts

In recent years, 401(k) plans have increasingly embraced brokerage link accounts as a means to empower participants with greater investment flexibility. As of 2021, nearly half of large 401(k) plans with more than 5000 participants offer brokerage link accounts, marking a significant trend in the retirement savings industry. This feature, which allows participants to access a broader range of investment options beyond traditional offerings, is gaining traction as more plans recognize the value it brings to participants’ retirement portfolios.

In this newsletter, we discuss the pros and cons of using a brokerage link account in a 401(k) plan. We point out several important advantages of utilizing such a feature for MyPlanIQ subscribers.

Background on Brokerage Link Accounts

Brokerage link accounts within 401(k) plans provide participants with the ability to directly contribute to a brokerage account, offering an alternative to the standard investment options typically found in traditional 401(k) plans. Unlike traditional plans, which often limit investment choices to a predefined selection of mutual funds or target-date funds, brokerage link accounts offer participants the freedom to invest in a wider array of options.


Historically, 401(k) plans have offered limited investment options, with highly variable quality. Some investment funds within these plans feature notably high expense ratios. Additionally, many are actively managed but yield low-quality returns with high risks. Another challenge for plan sponsors (i.e., employers) is selecting these investment options, as many benefit or human resource people in a company lack the requisite expertise and time for such a task. Unfortunately, some plan brokers even have conflicts of interest, resulting in 401(k) plans being populated with a limited selection of expensive, low-quality funds. Offering a brokerage link account feature for a 401(k) plan alleviates the above burden.

While most plans allow participants to allocate 100% of their contributions to the brokerage account, some plans may impose restrictions, limiting contributions to a specific percentage. For example, certain plans may cap contributions to the brokerage account at 90%, while others may have no restrictions at all. These limitations are plan-specific and may vary depending on the plan’s provisions.

Pros of Brokerage Link Accounts

For a plan participant or investor, there are several significant advantages. First, let’s examine some general benefits.

  • Expanded Investment Choices: One of the primary advantages of brokerage link accounts is the significantly expanded investment choices available to participants. This includes access to a diverse selection of ETFs, a wide range of no-load, no-transaction-fee mutual funds specific to the brokerage platform (e.g., Fidelity or Schwab), and in some cases, individual stocks. This broader range of options allows participants to tailor their investment portfolios more precisely to their individual preferences and risk tolerance. Note, that some plans might set restrictions with the brokerage so that certain investments are excluded. These often include excluding leveraged ETFs and company stocks.
  • Low-Cost Investment Options: Brokerage link accounts often offer access to low-cost ETFs and mutual funds, providing participants with the opportunity to invest in funds with competitive expense ratios. This can help to minimize investment costs over time, potentially increasing overall portfolio returns.
  • Access to Excellent Actively Managed Funds: In addition to passive index funds, brokerage link accounts may also offer access to a wide selection of actively managed funds managed by reputable fund managers. This can provide participants with the opportunity to invest in actively managed strategies that align with their investment objectives and preferences.

Let’s look at some concrete benefits for MyPlanIQ subscribers. These include

  • Excellent actively managed bond mutual funds or ETFs and MyPlanIQ’s portfolios. As noted above, a 401(k) plan often lacks of many choices for fixed-income bond investments. Though some excellent fixed-income funds such as PIMCO total return bond fund or a common collective trust are popular in many 401(k) plans, these plans usually lack other equally excellent total return bond funds such as those candidate funds in a total return bond fund portfolio like Schwab Total Return Bond. This greatly limits investors’ ability to boost fixed-income returns such as these income portfolios offered by MyPlanIQ. Of course, we can take a look at the latest returns of these portfolios, compared with a total bond market index fund like VBMFX or ETF BND:

Latest returns of model portfolios, click on portfolio names for more details

Ticker/Portfolio NameYTD
Return**		1Yr AR3Yr AR5Yr AR10Yr AR15Yr AR
Schwab Total Return Bond-1.3%-0.7%0.3%4.4%3.9%6.7%
Fidelity Total Return Bond-1.3%-0.8%0.2%4.4%3.9%6.4%
Etrade Total Return Bond-1.3%-0.8%0.2%4.4%3.9%6.6%
Merrill Edge Total Return Bond-1.3%0.8%-0.5%3.9%3.7%7.1%
Vanguard Brokerage Total Return Bond-1.4%-0.8%-0.4%1.3%2.2%5.6%
VBMFX (VANGUARD TOTAL BOND MARKET INDEX FUND INVESTOR SHARES)-3.2%-0.3%-3.6%-0.2%1.1%2.2%
PTTAX (TOTAL RETURN FUND A)-2.8%0.6%-3.7%-0.0%1.1%2.9%
DLTNX (DOUBLELINE TOTAL RETURN BOND FUND CLASS N)-2.3%-0.2%-3.4%-0.7%1.1%
MyPlanIQ total return bond fund portfolios

**YTD: Year to Date

The above outperformance (more than 5% excessive annual return over VBMFX) can be only accessed by utilizing a brokerage’s no-load (NL), no-transaction-fee (NTF) total return bond mutual funds.

Cons of Brokerage Link Accounts

However, brokerage link accounts do come with two major disadvantages:

  • Overwhelming Choices: While the expanded investment choices offered by brokerage link accounts can be beneficial, they can also present challenges for average investors. The abundance of options may overwhelm participants, leading to decision paralysis or the temptation to invest in speculative or inappropriate investments. Without proper guidance, participants may inadvertently choose expensive or underperforming funds, which can detract from their long-term retirement goals. Investors need to educate themselves. Furthermore, it is always more beneficial to exercise prudence in such a long-term and significant financial endeavor.
  • Management Nuances: Managing investments between a regular 401(k) account and a linked brokerage account can introduce complexities for participants. Navigating between the two accounts, rebalancing portfolios, and monitoring performance may require additional time and effort. Participants must remain vigilant in managing their investments to ensure they align with their long-term retirement objectives.
  • Brokerage link account-specific rules: Several complex issues arise when it comes to withdrawals, 401(k) loans, and rollovers. Investors should consult with their plan sponsors to understand these specific rules, which can vary depending on the individual plan or brokerage link account. Some rules are unique to each plan, while others apply universally across all plans and accounts.

In conclusion, brokerage link accounts offer participants a valuable opportunity to enhance their investment portfolios and optimize their retirement savings strategies. While these accounts provide numerous advantages and we encourage participants to take advantage of this feature, participants must also be mindful of the potential challenges and complexities involved. By understanding the pros and cons of brokerage link accounts and making informed investment decisions, participants can leverage these accounts effectively to achieve their retirement goals. This information is particularly relevant to MyPlanIQ’s paid subscribers, as they have access to our model portfolios, which offer valuable insights and strategies for their investment decisions.

Market Overview

In addition to the robust employment report in March, both retail sales and industrial production also experienced significant rebounds that month, with year-over-year gains recorded in each case. This has set us up for a prolonged period of strong economy, high inflation, and elevated interest rates. Unfortunately, this development is not particularly conducive to bonds or stocks, which have been affected accordingly. The stock market saw some minor retreat last week as a result, while bonds have declined year-to-date.

Now that we are entering earnings season, it’s worth noting that, as of last week, only a limited number of companies had reported results (14% of S&P 500 companies, to be exact). According to FactSet, the blended earnings growth for S&P 500 companies in the previous quarter came in at just 0.5%, which is significantly lower than the 3.4% expected at the start of March. Of course, we are still way early.

As always, we claim no crystal ball and we call for staying the course which is guided by the well defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as we have emphasized numerous times when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years, preferably much longer, given the current high valuation. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later and preferably many more years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

Stock valuation has dropped, and now valuation is becoming less hostile. However, it is still not cheap by historical standards. For the moment, we believe it’s prudent to be extra cautious. However, how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of market is through dollar cost average (DCA), i.e., invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

Struggling to Select Investments for Your 401(k), IRA, or Brokerage Accounts?

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