While most IRA providers allow you to invest in a broad universe of mutual funds, exchange-traded funds and individual stocks, the rules for 401(k)s and other employer-provided retirement plans are typically more restrictive.
Most offer a limited menu of mutual funds from which to choose, including target-date funds, which are one-stop portfolios of stocks, bonds and other assets that gradually become more conservative as you near retirement.
Many employees are just fine with a limited selection. Studies have shown that offering workers too many options reduces participation rates.
Faced with too many choices, some workers simply throw up their hands and walk away. In addition, employers are required by law to act in the interest of plan participants, which makes them reluctant to offer untested or risky investment choices.
But what if you’d like to take a little more risk in exchange for potentially higher returns?
About 40% of companies offer self-directed brokerage accounts in their 401(k) plans, which allow participants to invest in a much broader menu of mutual funds, ETFs and, in some cases, individual stocks. A small 401(k) provider, ForUSAll, is even allowing its participants to invest up to 5% of their account balance in cryptocurrency.
Historically, only a small percentage of savers have enrolled in self-directed brokerage accounts, but that could be changing.
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