What to Consider When Offering a Self-Directed Brokerage 401(k)

Author: / Reviewer: Callie Adams Farnsworth, QKA, CAFCA
1 May 2023 / 401(k) Plan Information

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When it comes to small business retirement savings, a 401(k) plan is one of the most popular options for employers to offer their employees. You may prefer a small business 401(k) over an IRA because the savings opportunities are so much better. But have you ever thought about offering a self-directed 401(k)? Before you sign any contracts, be sure you consider these pros and cons.

What is a Self-Directed Brokerage 401(k)?

It is a retirement savings plan that allows more flexibility with investing. Participants can choose and manage their own investments within the plan, but are still limited to the pool of general equities and bonds.

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What Are the Contribution Limits?

As of 2023, the contribution limits for a self-directed 401(k) plan are the same as a traditional 401(k) plan: $22,500 for those under age 50 and $30,000 for those age 50 and older.

Salary Deferral Contribution

Up to $22,500

Profit-Sharing Contribution

Up to 25% of income
Up to 20% of income for self-employed

Annual Limit Per Participant

Lesser of 100% of salary or $66,000

Catch-Up Contributions (if age 50 or older)


Benefits of Offering a Self-Directed 401(k) Plan

Flexibility: This type of retirement plan lets your employees invest in a wider range of assets than a traditional 401(k) plan. This gives them the flexibility to invest in assets they are more knowledgeable about and comfortable with.

Control: Employees have more control over their retirement savings with a self-directed account. They can make investment decisions based on their own research and risk tolerance, rather than relying on the plan’s default investment options.

Tax Benefits: This type of plan is similar in many ways to a traditional 401(k) plan. A self-directed brokerage 401(k) offers tax benefits to both the employer and employee. Any contributions you make are tax-deductible, and since your employee’s contributions are still made with pre-tax dollars, which helps reduce their taxable income just like a traditional plan.

Challenges of Offering a Self-Directed 401(k) Plan

Risk: Of course, any investment inherently carries risk, but with a self-directed brokerage 401(k), employees take on the risk of managing their own investments. If they make poor investment decisions, they could lose money, especially if they aren’t experienced managing an investment portfolio.

Complexity: It can be more complex to administer than a traditional 401(k). Because of the time and organization required, you may even need to hire staff or consultants to help manage the plan.

Liability: Opting for a self-directed brokerage account 401(k) plan may also open you up to the possibility of additional liability. If an employee makes a bad investment and suffers losses, they might blame you for offering the plan.

Costs: Be on the alert to additional fees certain types of investments may incur, particularly trading fees. Some investors enjoy the trading freedom a self-directed 401(k) enables, but they forget about how those trades result in transaction costs that add up with each sale or purchase.

If you’re interested in offering a self-directed brokerage account 401(k), it’s advisable to do so with the assistance of a knowledgable, experienced plan provider, financial consultant, certified professional accountant, tax attorney, broker, or fiduciary who has pledged to act in your best interest.

For most small businesses, it may be safer to offer a few different plan options and a contribution match – that way your employees still feel appreciated, and you don’t need to take on extra responsibility.


Ubiquity is not a registered investment advisor, and the information provided herein should not be considered legal or tax advice. We recommend consulting with your financial planner, attorney, and/or tax advisor for personalized advice.

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 300
San Francisco, CA 94104
Support: 855.401.4357

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