Employees are constantly demanding more options in their 401(k) plans. But remember the old saw -- sometimes with too much rope you just end up hanging yourself.

Brokerage account options in 401(k) plans are the latest trend in the push to offer employees more investment choices. But opening participants up to a universe of stocks, bonds and mutual funds can be overwhelming and dangerous if employees are not properly educated. At the same time, it could be a godsend for folks with horrible investment choices in their core plans.

But until the fiduciary responsibilities are ironed out and the education process is beefed up, it seems that neither employers nor employees are clamoring for this new perk just yet.

How Do Brokerage Options Work?

A plan sponsor can elect to include a brokerage option as a part of its overall 401(k) package. The sponsor then selects one brokerage house to handle all employees' trades. To establish an account, employees must transfer a lump sum out of their core 401(k) account. They then can allocate an amount to be directly transferred to their brokerage account from their 401(k) payroll contribution.

The plan sponsor can set a limit on the amount of transferable money. "We're seeing companies not allow more than 20% of the total plan balance," says Paul Heller, head of

Vanguard's

defined contribution business. But there's no written guideline. Other plans allow as much as 50%, says Sean Hanna, editor-in-chief of

401kWire. At this point, there generally is no limit on the number of trades employees can make.

Employees then can buy stocks, bonds or mutual funds with the money transferred into their 401(k) brokerage account. The

Internal Revenue Service

prohibits trading derivatives or securities on margin in these accounts.

Commission schedules typically are the same as with regular taxable brokerage accounts. For instance,

Charles Schwab

charges $29.95 per stock trade, while

Fidelity's

price is $14.95.

There is an annual charge to have a brokerage option in your 401(k), generally between $50 and $100. "Your employer can opt to pay it, but most pass it on to the employee," says Walter Bettinger, chief operating officer of retirement plan services at Charles Schwab. So the fee would come out of the 401(k) assets.

While employees would pay the broker commission charges, the money in the brokerage account is not subject to the typical 401(k) management fees, notes Hanna.

The Pros

But is it a good thing to give employees the ability to trade their retirement money actively?

If you're judicious and just buy a few good stocks and a few inexpensive funds and hold them until you retire, you actually may be better off with the brokerage option. While you pay the initial transaction costs on the trades, you no longer pay management fees on that money. So if your plan has poor choices or has high fees and expensive funds, then a brokerage option could be a benefit.

While it's easy to assume that giving people a self-directed brokerage option will tempt them into more risky investments, Schwab is not seeing that. "Our participants are actually investing even more conservatively," says Bettinger.

The Cons

Of course, there are some folks out there who will daytrade their retirement funds away. And this is where things get scary because, for many families, the 401(k) account is the largest household asset. So opening the investment world up with a brokerage option requires serious education.

With a regular 401(k) plan, it's assumed that your employer did some homework and picked some good investment options. But with a brokerage option, you've got to educate. "I just don't think the majority of participants are that savvy," says Roxanne Fleszar of

TheStreet Recommends

Financial Resources Management

in Peabody, Mass.

It seems even the pros are not ready for it. Vanguard does not offer its employees a brokerage option in the company 401(k) plan, says Heller. Fleszar points to her client

Inc.

magazine, which covers small businesses. "They ask about it all the time, but are not ready to make the leap and offer a brokerage option."

Employees are hit with fees every time they make a trade, so paying those fees could affect the overall return of the active trader. But bull market investors don't care about fees. "It hasn't been a fee question as much as 'Give me everything and let me swing for the fences,' " says Drew Lawton, executive VP in Fidelity's institutional retirement services. They'll start to care more if and when a bear market hits.

The question of who takes responsibility remains unanswered, as well. Typically, your 401(k) plan is covered by the 1974

Employee Retirement Income Security Act

, aka Erisa, which says that your plan sponsor must act responsibility on your behalf. But with money in a brokerage option no longer under your plan sponsor's management, who's responsible?

It'll just take one lawsuit to clear up the matter -- one employee who transfers his entire 401(k) account into a brokerage account, dumps it all on one stock and then loses it all. He'll take his company to court and cry, "You should've protected me!" A verdict will set the precedent that is needed.

Who's Using Them?

Until that happens, companies are hesitant. "We haven't seen a huge adoption rate for them yet, says Lawton. He sees plan sponsors acting cautiously because they are worried about the fiduciary risk.

Of the 7,000 companies that have their 401(k) plans with Fidelity, 5% added the brokerage option. Less than 1% of Vanguard's clients went to the brokerage option, although industrywide, some 10% of all 401(k) plans now have a brokerage option.

Interestingly though, very few employees are biting. But those who are are diving in headfirst. Only 5% of Fidelity's clients' employees with a brokerage option are using it. But that 5% moved 30% to 50% of their total 401(k) money to the brokerage window, says Lawton.

"It's the very small, high-paid vocal minority that is moving the money around," says Hanna, which is probably why more specialized outfits like law firms, engineering firms and doctor's offices eagerly are adding this option to their plans. But those few folks are moving lots of money. For instance, at Vanguard, 17% of all 401(k) plan participants moved money in 1999; of the total money moved, 1% of those participants moved half of it.

"But the average employee doesn't have any desire to trade retirement money," says Hanna.

Schwab disagrees. It's seeing massive growth in its "personal choice retirement account" (its version of the brokerage option), with assets up about 119% from $2.1 billion to $4.6 billion from June 1999 to June 2000. The number of brokerage accounts in 401(k)s has grown by 88%, according to Bettinger.

Is This a Trend?

Will the future 401(k) be one big brokerage account? Neither Vanguard nor Fidelity thinks so, at least until all the fiduciary kinks are worked out.

Employees are demanding a brokerage option, though, even if they're not using it. So employers may continue to add the option to differentiate themselves in today's tight job market.

But Schwab believes this is "a continuation of the participant's empowerment."

The overall trend is definitely toward expanding investment choices. But hopefully with that trend comes an increase in participant education and a reintroduction to the old-fashioned long-term investment philosophy.

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