Self-directed 401(k)s: Plan sponsors need to provide resources to participants

Account balances within self-directed brokerage accounts (SDBAs) continue to decline quarter over quarter, although they remain above last year’s figures, according to Charles Schwab’s SDBA Indicators Report, which tracks participant investment activity across the firm’s SDBAs.

The report found SBDA average balances closed the third quarter at $287,769, down 9.2% from the previous quarter but up 5.3% year over year. Trading volume also slackened to an average of 78 trades per account, compared with 10.3 trades per account in the second quarter of 2023.

This follows a trend Schwab has uncovered in its SDBA Indicators Report suggesting a trend toward declining average account balances. Earlier this year, the firm said the average account balance for SDBAs closed down 20.6% year over year at the end of 2022 at $280,099, although that was up 2.45% from the third quarter of 2022. At the time, Schwab said year-over-year returns remained negative for the fourth consecutive quarter, consistent with the market overall.

“While balances decreased from the second quarter, they increased from the prior year,” said Mike Ponce, managing director, Schwab Retirement Business Services. “SDBA balances tend to follow market and economic trends, so factors like inflation and volatility certainly can affect performance and could influence how 401(k) participants choose to invest in their plans.”

Schwab continues to see that despite these short-term swings, participants are taking the long view, said Ponce.

“They have maintained similar and balanced asset allocations from quarter to quarter as they prioritize investing for their futures,” he said.

SDBAs are brokerage accounts within retirement plans, including 401(k)s and other types of retirement plans that participants can use to invest retirement savings in individual stocks and bonds, as well as exchange-traded funds (ETFs), mutual funds and other securities that are not part of their retirement plan’s core investment offerings.

Allocation trends in SBDAs remained similar to second quarter 2023. Equities remained the largest participant holding at 34.2%, and the largest sector holding was information technology at 30.1%. The top equity holdings remained Apple, Tesla, Amazon, NVIDIA and Microsoft. Mutual funds were again the second-largest holding at 28.8% followed by ETFs at 21.9% of participant assets. Cash and equivalents held 9.7% of participant assets while 5.4% of assets were held in fixed income.

Advised accounts held higher average account balances compared to non-advised accounts at $468,516 vs. $251,723, the report said. On average, participants held 11.8 positions in their SDBAs at the end of Q3 2023, slightly lower than the prior year and prior quarter.

Generational differences were highlighted in the report. SDBA participants aged 59 and over were 27.6% out of all participants, while the Gen X participants were higher at 46.1% and millennials were at 20.7%. Baby boomers had the highest SDBA balances at an average of $466,246, followed by Gen X at $270,370 and millennials at $97,875.

Related: Personalized 401(k) options: Is the desire for control & customization driving demand?

“SDBAs provide a much wider range of investments than core 401(k) menus, offering plan sponsors and advisors a solution to meet the needs of participants who want more control and choice when it comes to their investments,” said Ponce. “However, participants may not be aware of the scale of the offerings in SDBAs.”

Plan sponsors and advisors can help savers by providing resources that explain the different options available in their plans and best practices for achieving investment objectives, said Ponce.

“Practical education is key to providing both personalization and desired outcomes for retirement plan participants,” he said.