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Considerations for Plan Sponsors Mulling SDBAs

Practice Management

While the current environment appears ripe for self-directed brokerage accounts (SDBAs) as various plan participants welcome the opportunity to select investments that reflect their values and priorities, plan sponsors should carefully consider the tradeoffs, a new study suggests.  

While SDBAs provide retirement plan participants with access to numerous investment options, the resulting investments can also create potential risks to those participants and plan sponsors, according to findings from The Cerulli Edge—U.S. Retirement Edition, 4Q 2021 Issue.

Still, by taking a fresh look at SBDAs as an investment option for their plans, plan sponsors can harness participant enthusiasm to increase interest in and engagement with their retirement plan, the study notes. 

In many ways, SDBAs represent the push and pull associated with DC plans—the goal of a secure retirement for plan participants versus the desire to give participants maximum control over how they achieve that goal, the study explains. Yet, if plan sponsors want to use SDBAs to increase retirement plan participation and engagement, they may need to make clear the ways in which participants can leverage SDBAs to shape their investment choices, according to Cerulli.  

“Plan participants may see their self-directed brokerage window as an opportunity to gain access to specific types of investments that meet their unique needs and wants or simply to have more investment choice than the plan’s core fund line-up generally offers,” observes Shawn O’Brien, Senior Analyst at Cerulli. 

For instance, some may want to invest in mutual funds that meet certain criteria or are simply more specialized than the funds in most retirement plans’ core fund lineup. Participants may also want to gain access to socially responsible investments that reflect their values, notes O’Brien. For example, retirement plan participants may find it difficult to invest their retirement assets in environmental, social, and governance (ESG) funds when making investments without access to a SDBA.

Still, while SDBAs are not as prevalent in plans, the percentage offering them is inching up. According to Cerulli’s analysis of Form 5500 filing data for the 2019 plan year (as of September 2021), only 1 in 10 401(k) plans offer SDBAs, but this is up from 8% in 2010. However, the largest 401(k) and 403(b) plans with more than $1 billion in assets are four to five times more likely to offer a SDBA than the smallest plans. 

For comparison, according to the Plan Sponsor Council of America’s 63rd Annual Survey of Profit-Sharing and 401(k) Plans, roughly a quarter (23.2%) of all plans offer SDBAs, and nearly 40% of those with more than 5,000 participants do. 

Potential Risks

Meanwhile, even though SDBAs can provide retirement plan participants with access to numerous investment options, the resulting investments can also create potential risks to participants and plan sponsors, the study further notes. “It would be both easy and unsurprising for plan participants to overestimate their investing knowledge,” says O’Brien. “With the freedom to choose from a wide array of investments and execute trades as they see fit, these individuals may end up overtrading or taking on more or less risk than is prudent given their age and circumstances,” he emphasizes.  

Cerulli’s research points to fees as a potential risk as well. While trading fees have declined sharply or disappeared altogether, the investments bought and sold through a SDBA may have their own underlying fees, which may not be as low as the institutional pricing offered by many retirement plans’ core funds.

For these reasons, the study notes, plan sponsors might consider placing certain guardrails around SDBAs to mitigate some of the risks associated with these accounts. In some cases, plan sponsors place limits on the investments available through the SDBA and what participants can do within their accounts. 

For instance, according to Alight Solutions, 60% of plan sponsors offering SDBAs allow full brokerage use, 31% allow only mutual funds to be included in the SDBA, and 9% allow a mix of mutual funds and ETFs. One-fifth of plan sponsors only allow plan participants to invest 50% of their account balances through the SDBA, the study notes. 

Within plans overseen by the Vanguard Group that offer participants an SDBA, half present a full self-directed brokerage account, while nearly 40% cap the percentage of the balance that plan participants can allocate to it.


With the right approach, retirement plan sponsors can maximize the positives and mitigate the negatives, Cerulli emphasizes. As such, plan sponsors need to consider a range of issues when deciding whether to offer an SDBA and how to structure it. “Everything from the demographics of plan participants to the feedback coming from those participants to the plan sponsor’s legal and regulatory concerns should be in the mix,” the study notes.  

The study observes that some plan sponsor groups have asked the Department of Labor for guidance on this issue and clarification whether plan sponsors have a fiduciary responsibility to vet every investment option available through a SDBA. Yet, other industry groups are opposed to any additional guidance on SDBAs, believing that any guidance could have a “chilling effect on use and create problems where none currently exist.”

Cerulli further observes that it is important for plan sponsors offering a SDBA to monitor how and how well plan participants use the SDBA to manage their assets.

“Considering the personal biases many individuals bring to any decision-making, even the savviest investors can run into problems when managing their own money,” the study notes.