Why is it that with my IRA I can buy individual stocks, ETF's, mutual funds, etc yet in my 401(k) plan I am limited to select funds? Luckily the funds I have to choose from are decent but I can't understand the logic of why I could have a 401(k) administered by someone like Fidelity or Vanguard, have an IRA there as well but the 401(k) is limited in its investment options.

It seems crazy to me that if you are stuck at a company long term and all of their 401(k) investment options are in high cost funds you are just stuck with that for retirement savings (assuming you are at an income level that prevents you from also investing in an IRA).

Is there a logical reason why 401(k) participants are not given the same freedom for choosing what they invest in as those with IRAs?

1 Answer 1


401(k) participants can be given the same freedom as in an IRA, via a "self-directed brokerage option" in the 401(k).

For the provider, limiting the full gamut of options to those who opt into directing the investment themselves is critically important, because ERISA places a fiduciary duty on the employer regarding the funds that are offered in the 401(k) plan. Any fund they add to the plan, may result in needing to defend that decision in court one day.

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    +1 but in my (limited) experience, the "self-directed brokerage" option usually has large maintenance fees (charged by the 401(k) administrator), much more than the standard option, and was not really worthwhile unless the 401(k) assets were about $500K or so, Good for the highly-paid executives, not so great for the ordinary worker with smaller amounts to invest. Nov 1, 2018 at 3:33
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    One would think that a fiduciary duty would induce providers to offer low-fee funds, but that is often not the case.
    – BrenBarn
    Nov 3, 2018 at 7:15
  • @BrenBarn: While the "average" low fee fund outperforms the "average" high fee fund, by approximately the amount of the fee, this relationship doesn't hold at the tails. The best-managed funds easily pay for their management fees. What does seem very odd, in the context of fiduciary duty, is when a retirement plan includes a share class with a 12-1b fee, when the plan is large enough to use another share class with a lower expense ratio. In such a case there is zero possibility that the fat-fee class can ever outperform the leaner share class. 12-1b kickbacks should be a fiduciary violation.
    – Ben Voigt
    Nov 3, 2018 at 14:54
  • @BenVoigt: Yes, but if low-fee funds are better on average, why would there be any expectation that the high fee fund you happen to have in your 401k is better than a low fee fund?
    – BrenBarn
    Nov 3, 2018 at 19:40
  • @BrenBarn: One, the managed funds that are better tend to be restricted to very large investors, which includes retirement plans. Two, the fact that not all high fee funds are bad means that ERISA doesn't bar employers from choosing high fee funds. They can claim they tried to find the best funds and got unlucky, but you need more than that to win in court. It's much easier to punish self-dealing or kickbacks.
    – Ben Voigt
    Nov 3, 2018 at 19:46

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