In the constant struggle to save for your retirement, a 401(k) plan can be your most valuable asset. But a 401(k) is only as good as the investment choices your plan offers. With a self-directed 401(k), you can turn the tables on the restrictive menus that so many employers have and choose the investments you want to help you retire comfortably.

Why you need a self-directed 401(k)
The vast majority of 401(k) plans don't offer a self-directed option. Instead, they typically rely on mutual funds, which give workers an easy way to get diversified exposure to different types of stocks, bonds, and other investments even if they only make small contributions from every paycheck.

There's nothing inherently wrong with mutual funds. What is problematic, though, is when employers don't give their employees the best mutual fund choices available. By locking workers into unfavorable funds, employers can end up sabotaging their workers' retirement prospects -- even as they think they're supporting their workers. By contrast, if your employer offers a self-directed 401(k) option for its workers, then it leaves the door open to your finding better investments on your own.

Dealing with duds
Last year, Morningstar took a look at 30 fund families. It ranked them on a number of factors, including performance, manager experience, and how much of their own money fund managers invest within the fund family. The results were revealing, as no-load managers Dodge & Cox and T. Rowe Price (Nasdaq: TROW) finished at the top of the list. Near the bottom, on the other hand, were AllianceBernstein (NYSE: AB), BlackRock (NYSE: BLK), and Hartford Financial (NYSE: HIG).

Unfortunately, not all employers have the investment expertise to be able to tell whether one company's funds are better than another's. As a result, your employer may consider other factors, such as the employer's own administrative costs in managing your 401(k) plan, rather than focusing on giving you the best alternatives.

That's why a self-directed 401(k) option can actually be the best of both worlds. By turning responsibility over to workers to come up with their own investment choices, employers don't have to spend a lot of time figuring out which options are the best ones to include in their 401(k) plans. At the same time, employees don't have to constantly lobby for different fund options, which can be especially difficult if a fund family that used to be strong suddenly loses its way.

How self-directed 401(k)s work
Having a self-directed 401(k) option is almost like having a separate brokerage account within your 401(k). With it, you can buy any number of different investments, including stocks, bonds, exchange-traded funds, mutual funds, and in some cases even more specialized investments like real estate or precious metals.

With most self-directed 401(k)s, you'll end up paying a commission every time you make a trade. That's often a big contrast to regular 401(k) investment options, many of which don't charge you any upfront commission at all. But when you look more closely at the fees that various mutual funds charge, you may well end up paying less over the long run by using a self-directed 401(k) to invest rather than sticking with the default fund choices your plan offers.

How to get a self-directed 401(k)
Unfortunately, unless you're self-employed and can set up your own plan, it's not up to you whether you can have a self-directed 401(k). You'll have to ask your HR representative whether your employer would be willing to consider adding a self-directed option to an existing plan.

Given what's at stake, though, asking about a self-directed 401(k) is well worth the effort. You have nothing to lose, and if your employer agrees, it could give you the flexibility you need to invest a lot more successfully for your retirement.

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