How Can You Invest Your 401(k) in Stock Investments



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Woman consulting with financial advisor to see how she can invest her 401(k) into stock investments.

401(k) Plans provide a wide range of different and sometimes confusing options to invest your retirement money. Your main objective is to grow the money you put into your retirement account. Investing in stocks has long been one of the best drivers of growth in retirement portfolios. So an important question is: How Can You Invest Your 401(k) in Stock Investments?
One of the most significant disadvantages of 401(k) Accounts is that you are limited by what your employer-sponsored plan offers. These investment options might not always match your risk tolerance, but you don’t have much choice. One option that you might not yet have heard about is what’s called a Self-Directed Brokerage Account. Such an account type exists and allows you much more freedom in how you invest your retirement money in the stock market.

But it’s a good idea to understand the basics first to avoid common mistakes. After all, we are discussing the retirement savings and nest egg that should get you through your golden years!

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What are the Rules and Regulations around 401(k) Accounts?

First of all, your 401(k) Account is employer-sponsored. This means you can’t just go and create a 401(k) Account on your own. You will need to be employed in a company that offers one. The employer is sometimes referred to as the plan sponsor.

You contribute money to a 401(k) through your paycheck. One key advantage is that all contributions are done pre-tax. So, your contribution is taken directly from your net pay, and you don’t pay taxes on that contributed amount. That’s a significant tax advantage.

A lot of employers also offer an employer match. When you contribute a portion of your paycheck, your employer might match that amount and put extra money into your account. If your 401(k) account comes with an employer match, make sure to maximize that match as much as you can. It’s basically free money for you!

There are limits to how much money you can contribute to a 401(k) account each year. These limits can change each year. For 2023, they are $22,500 if you are under 50 and $30,000 if you are 50 or older.

There are also distribution rules for your 401(k) money. Generally, you can’t take out any money before you are 59 1/2 years old. Exceptions to that rule are disability or financial hardship. If you are planning to withdraw money due to a financial hardship, It’s important to know if your specific situation is covered under the financial hardship rules.

Why is it important to Invest Your 401(k) in Stock?

There are many different asset classes you can invest in, from stocks, bonds, and cash to real estate. Finding the right mix based on your own risk tolerance and other factors isn’t always easy.

Stocks are the most popular and widely used option. That doesn’t surprise me since the stock market has offered a handsome return on long-term investments. Sure, there are economic downturns, but in general, the stock market has increased more than it has gone down.

Market volatility is still a risk factor you can’t fully ignore. The closer you come to your retirement age, the more stable you want your invested money to become. This is why age should be the driving factor in making your decisions.

What Fund Types can you use to Invest your 401(k) in Stock?

401(k) plans can come with various fund types. Possible options include Target-Date Funds, Conservative Funds, Balanced Funds, Aggressive Growth Funds, and more. Most, if not all, of these fund types include stocks in some ways, like mutual funds. The funds differ in how aggressively they invest and in their asset allocation. Some funds have more large-cap stocks, while others have a mix of international and domestic stocks. Every fund has a detailed prospectus containing a summary, investment objectives, charges, expenses, etc. These are complex documents, but they give you all the details you need to make a well-informed decision. Reading them is a good way to know what you are investing in.

The investment choices available to you are provided by your plan administrator.

Target Date Funds

The most widely used fund type in your 401(k) is a Target-Date Fund. It’s a mutual fund with an investment mix based on when the investor reaches retirement age. If you are 20 years old in 2023, you will retire in 2068. In your 401(k) account, you might find a fund called “…2068 Fund.” The basic concept is simple: The longer you have until retirement, the more aggressive the investment mix can be. As you come closer to retirement age, the time left to recover from a market downturn is shortened. A conservative mix with fewer stocks and more secure assets like bonds or cash can protect your savings. Over time, the mix of your Target-Date Fund will automatically change.

Target-date funds are available in almost all 401(k) plans. They are easy to select, well-diversified, and very hands-off. Maybe you have a higher risk appetite but only have these Target-Date funds in your plan. One possible approach is selecting a Target-Date Fund farther out than your retirement age. You will get a more aggressive mix of asset classes than you would typically get.

Value Funds

This fund type has a medium risk level. The companies in a Value Fund are usually large, established businesses that are undervalued. Oftentimes, these companies do pay a dividend, too.

Value investing has become much more popular in times of higher interest rates than growth investing. When capital isn’t as readily available anymore, it’s hard to justify long stretches with no profitability. Of course, these trends can change over time while saving for retirement, but these synergies are important to understand.

Aggressive Growth Funds

These fund types are trying to find the next Amazon and are much more risky. Growth companies are usually in a very early stage and mostly not yet profitable. Choosing a growth fund for your retirement savings should be viewed with caution. If you do, don’t invest too much money from your account. You will have much more volatility in these fund types.

As a young investor, you can take much more risk as your retirement age is still far out. Aggressive Growth Funds can have market-beating returns, but that is by no means a guarantee.

Self-Directed Brokerage Accounts

A Self-Directed Brokerage Account, also known as a 401(k) brokerage window, is a great option if you are a very knowledgeable investor. With such an account, you can invest your retirement money entirely alone. You can invest your 401(k) in stock investments, mutual funds, low-cost index funds, exchange-traded funds, and more.Take a look at your plan to see if it provides such an option. Self-Directed Brokerage Accounts provide the maximum flexibility. They basically work the same way as your normal brokerage account.

It is important to point out that managing your retirement money alone carries significant risks. It is fully on you to keep your investments diversified and adjust as necessary. This approach is definitely not recommended for everyone since you can make many mistakes. But done right, it provides a clear pathway to get even higher returns and to adjust your investments to your style of investing.

Another option is to hire a financial advisor to help you along the way. Finding a good financial advisor is not easy. I recommend the Garrett Planning Network, the National Association of Personal Financial Advisors (NAPFA), and the XY Planning Network. These networks can get you in contact with a fee-only advisor. No matter how much money we are talking about, it will not change your costs.

Another factor to watch out for is fees. Some brokerage firms are charging fees for their services. Check your investments for fees like mutual fund expense ratios.

Traditional IRA Accounts and Roth IRA Accounts also support Self-Directed Brokerage Accounts.

What to know before opening your 401(k) Self Directed Brokerage Account

If you want to use a Self-Directed Brokerage Account in your retirement plan, the first decision is to determine the percentage of your retirement savings you’d like to manage. You can, of course, put in all of it. But it might also be a good idea to only manage a portion of the money in your Self-Directed Brokerage Account.

The next step is to look at the maintenance fees and all other potential fees of your investments. Aim for 1% or lower as a general rule. This step can save you. a lot of money over the long term. Any additional fees, like financial advisor fees, should also be included in this step.

Once you have a full overview, you can decide if a Self-Directed Brokerage Account is the right choice. Doing so is a great commitment and should be taken very seriously. You should revisit and track your progress very closely and avoid common mistakes such as emotional changes. Maintaining a true long-term investor mindset is a must for you to avoid greater risk.

Final Thoughts – How Can You Invest Your 401(k) in Stock Investments

Your 401(k) account has many tax advantages but also rules attached to it. Many different options on how you can invest your 401(k) in stocks are available to you. In fact, almost all of the funds offered contain some component of stock investments.

In this post, we discussed the rules and regulations of 401(k) accounts. You also learned about the different fund types you usually find in your 401(k) account. You learned how you can make a decision based on your risk appetite. Self-Directed Brokerage Accounts can be a very valuable option for you too. If you are a savvy investor and want to maximize your return, such an account can be your solution.

Nothing is risk-free. There is always some component of risk involved with stock investments. However, many different fund types are available for various risk profiles.

Lastly, we discussed options to consult a fee-only financial advisor. I really think that fee-only financial advisors are a very fair and transparent option to get the help you need.

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8 responses to “How Can You Invest Your 401(k) in Stock Investments”

  1. Henri Avatar
    Henri

    VERY informative. Thanks for the honest reminder that nothing is risk-free.

  2. Selene Avatar

    I’ll be sharing this info with my partner, he is looking for ways to invest and this is so well informed.

  3. Kevin Foodie Avatar

    Unfortunately, I have never had a privilege of working for a company that match my 401K. Therefore, I do not contribute a lot due to debt I was trying to pay off. The self-directed brokerage account sounds like a good idea to avoid brokerage fees. Very informative post as always. Thanks for asking.

    1. Andy Reimann - StockFit Avatar

      Debt is definitely important to take care of, especially if it carries a high interest rate. As for self directed brokerage accounts, they are definitely lower cost. But they also put a lot more burden on you as an investor. You need to make the right decisions. That’s why they are definitely not for everyone. But if you are good with that, it’s a wonderful way to manage your retirement savings. And it is also available as an IRA, separated from an employer!

  4. Susan Avatar

    My 401K is invested in stocks, but the volatility of current events and the stock market have me quite nervous. I’ve put a lot of my other stocks into EFTs and an annuity, as I’m getting fairly close to retirement age.

    1. Andy Reimann Avatar

      Yes, markets can be volatile at times. And they can also stay that way for multiple years. If that is something that keeps you up at night, you could shift a small portion of the money into more secure and more conservative funds.

      Broad ETFs are a good way to ease that volatility while still being invested in stocks. But there are also other types of assets available such as bonds or even cash.

      I like to be a bit more aggressive when it comes to investing. A safety net of a few years in cash in retirement can allow you to weather a downturn much easier while maintaining stock ownership. But it is a risky strategy since downturns can also take much longer to recover (see the financial crisis 2008).

      It all boils down to your risk tolerance at the end of the day. Because your goal should be to not worry about money all the time, and instead live your life to the fullest 🙂

  5. Nisee Avatar
    Nisee

    Understanding 401K is a big deal, most people don’t and miss the opportunity leaving money on the table.

    1. Andy Reimann Avatar

      I couldn’t agree more!
      There is so much confusion around the topic, but it doesn’t have to be that way. Especially because of the repercussions that making mistakes in your 401k carries.

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 #1 Buy and hold Stocks for 5+ years
 #2 Have at least 25 Stocks
 #3 Don't overreact on short-term news
 #4 Reinvest into your winners

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