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Choosing Individual 401k Plans: All That Glitters Is Not Gold

By Dmitriy Fomichenko, President and Founder of Sense Financial


"The individual investor should act consistently as an investor and not as a speculator." - Ben Graham

Have you ever wondered about the utility of packaged deals you received in a contract? In most of the cases, if you're getting something at surprisingly low prices, there's a catch. The same rule applies to retirement plans. Individual 401k plans or Solo 401k plans have gained popularity over the last couple years, especially among owner-only businesses and self-employed professionals. Did you ever wonder why some institutions offer Solo 401k plans free of cost whilst others charge a fee? The same rule applies here and we are going to discuss the different types of plans available in the market.

What are the different types of Individual 401k plans?

Individual 401k Offered by Financial Institutions

This is the most popular option available in the market. You can open an individual 401k plan, at no cost, at many of the major financial institutions or banks. How do these institutions benefit from managing your retirement plan for free? There's a catch.

They offer a basic plan document, which allows you to make pretax employee deferrals or profit-sharing contributions but limits your investment options. In most of the cases, these investment options include mutual funds, ETFs, stocks, and similar financial products offered by that institution itself. Your money doesn't get the benefit of alternate investments or Roth savings, which could have a substantial impact on your retirement portfolio.

Individual 401k Directed by Custodians

The next option in line involves custodian-directed individual 401k plans. Unlike the individual plans offered by financial institutions, these plans offer a somewhat bigger range of investment options including real estate, private equity, precious metals, and private businesses. These plan custodians profit by charging an annual fee for plan maintenance and other transaction-based charges.

While individual 401k plans offered by custodians provide better investment flexibility, they require custodian consent or approval for every transaction, making it a lengthy process. The additional processing time could have an adverse effect on time-sensitive transactions.

Individual 401k Plans With Open Architecture

Open architecture individual 401k plans are gaining popularity among self-employed professionals, primarily because of its operational flexibility and investment freedom. You can open this account at any of your local banks and act as the plan trustee, gaining more discretion over the investment choices. These plans are self-directed in the right sense. Some of the available features of these plans include checkbook control, Solo 401k loan option, and customization as per your retirement goals.

You can find plenty of Solo 401k providers that offer open architecture individual 401k plans. While these plan providers charge a reasonable annual maintenance fee, they offer value in terms of advisory services and assistance in plan compliance.

Dmitriy Fomichenko is President and Founder of Sense Financial, a leading provider of retirement accounts with "Checkbook Control": the Solo 401k and the Checkbook IRA. To learn more about the Solo 401k plan, please visit sensefinancial.com or email us at info@sensefinancial.com.


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