401k plans are slowly getting better. My plan added a low-cost collective trust. My wife’s plan added a self-directed brokerage account, also known as a brokerage window. Her plan is managed by Fidelity. Fidelity calls it BrokerageLink.
Some 401k plans managed by Charles Schwab also have this feature. Schwab calls it PCRA — Personal Choice Retirement Account.
How Does It Work?
Fidelity BrokerageLink is listed in the plan’s investment options just like another fund. She can designate a percentage of her ongoing payroll deductions toward it. She can transfer money between it and other funds. She can rebalance her plan account by saying what percentage of the total plan account should be in BrokerageLink.
Inside BrokerageLink, it’s just like a regular brokerage account, with its own account number. You can buy or sell pretty much everything you can with a regular brokerage account.
The "link" that connects BrokerageLink to other funds in the plan is a money market fund. Money going into or coming out of the brokerage account is put into or taken from the money market fund. From there, you place trades to buy or sell other mutual funds, ETFs, individual stocks and bonds, etc. This is similar to how Vanguard Brokerage Service works.
Because it’s a two-step process, it’s too much trouble to put a percentage of the ongoing payroll deductions into BrokerageLink and place trades twice a month. Instead, it’s easier to still put the ongoing payroll deductions into core funds. Transfer a chunk to BrokerageLink after the money builds up to a larger sum.
Other 401k providers often charge a high annual maintenance fee and high trading commissions for the self-directed brokerage account. A fee of $100 to $200 per year is quite common. Fidelity doesn’t do that. Its BrokerageLink has the same low prices as its retail brokerage accounts. There is no annual fee. Commissions are the same as retail:
- Fidelity funds: free
- Treasury bonds: free
- new-issue brokered CDs: free
- select iShares ETFs: free
- Vanguard ETFs: $8 a trade
The brokerage window opens up a world of good investment options. Prior to adding Fidelity BrokerageLink, my wife’s plan only offers two index funds: an S&P 500 fund and a US bond index fund. With Fidelity BrokerageLink, she will have many good options. I’m showing some of the best options here.
Spartan Index Funds
Fidelity’s Spartan index funds are its answer to low-cost index funds from Vanguard. There aren’t as many as at Vanguard, but if you are limited to Fidelity, there are enough good choices. Notable ones include:
- Spartan Total Market Index Fund (FSTMX)
- Spartan International Index Fund (FSIIX) [Note: developed markets only; no emerging markets]
- Spartan U.S. Bond Index Fund (FBIDX)
- Spartan Intermediate Treasury Bond Index Fund (FIBIX)
There are some newer Spartan index funds, but they are still too new for me to consider at this time.
Fidelity has a joint marketing deal with iShares to make 30 iShares ETFs commission-free at Fidelity. iShares ETFs aren’t as cheap as Vanguard’s but they are good enough. If you purchase often, the lack of commissions will make up for the slightly higher annual expenses. Some notable ones include:
Vanguard ETFs will cost a $8 commission per trade in BrokerageLink. It’s best if you transfer a chunk to the brokerage window, buy in one trade, and then hold them and select free dividend reinvestment. If you buy a large chunk, paying a one-time commission is better than paying a higher expense ratio every year to a similar iShares ETF. Some notable ones include:
- Vanguard Value ETF (VTV)
- Vanguard FTSE All-World ex-US ETF (VEU)
- Vanguard FTSE All-World ex-US Small-Cap ETF (VSS)
- Vanguard MSCI Emerging Markets ETF (VWO)
With all these great investment options, Fidelity BrokerageLink makes a big difference to an average 401k plan.