The Pros and Cons of a Self-Directed 401k

One of my first jobs out of college was also one of my first to offer benefits. Besides familiarizing myself with our healthcare and retirement benefits, I was responsible for keeping track of any upcoming changes in our benefit offerings. Along with a gym membership and commuter benefits, the self-directed 401(k) was one of the major new offerings I saw on deck during my in time in HR. I found that the self-directed 401(k) only differed from a traditional 401(k) in two regards:

  1. More Options. The self-directed 401(k) didn’t limit my investments to a pre-selected list of mutual funds. Instead, it offered a wider variety of options including: bonds, stocks, real estate, private mortgages and precious metals.
  2. More Responsibilities. In a self-directed 401(k) I am the funds manager. This means I’m responsible for monitoring stocks and doing due diligence on my investments.

Like more traditional options, the self-directed 401(k) has its pros and cons.

Self-Directed 401(k) Pros

Tax Benefits

With the self-directed 401(k), I still enjoy the ability to fund my retirement account with pre-taxed dollars.

Increased Growth Potential

With a self-directed 401(k), I expand my investment field and thus expand my growth potential. I like to compare it to a massive dinner buffet. The self-directed 401(k) plan includes thousands of investment options. Whereas the traditional 401(k) is more like a price fixed menu. I’ve seen employers offer a pre-selected list of no more than a dozen options.

Self-Directed 401(k) Cons

Fund Manager Responsibilities

The downside of more options is that it can make an already complex process even harder. I’ve seen those with advanced investment experience act as their own funds manager just fine. For a larger group of people, the options and responsibilities are too overwhelming. Those who trade stocks are required to “babysit” them.

Lots of Homework

Also, since the self-directed 401(k) allows non-traditional investments like real estate, doing due diligence on them can be even more of a responsibility. The financials associated with traditional traded investments are more readily available.


Fee structures for self-directed IRAs vary, but they generally cost more than the traditional route. There are annual maintenance fees to consider. Plus, stock trading fees can easily add up and chip away at your total retirement fund dollars.

Bottom Line

The self-directed 401(k) is a growing retirement option. However, there is one critical question I’d ask myself before going this route.

What are my retirement goals and financial needs?

The self-directed 401(k)’s wider field of investment options can blind individuals into taking risks that aren’t compatible with their overall goals and needs. Once you’ve answered these questions, we can help you setup your own self-directed 401(k) or choose from a variety of other retirement options. If you still have additional questions, contact us or feel free to  set up your consultation today.

Last Updated: 
April 10, 2018

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

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