Is It Time to Rethink the Brokerage Option?

Why offer a brokerage option if participants don’t use it?

Vanguard examined the self-directed brokerage feature in defined contribution (DC) plans and released the results in a recent research note. In 2014, 16% of Vanguard plans offered a self-directed brokerage option, with large plans somewhat likelier to offer the option.

Fewer than 10,000 of Vanguard’s 3.6 million participants use the brokerage option. Slightly more than one-quarter (28%) of plan participants had access, but just 1%—9,208—actually took advantage of it. In fact, in 10% of plans offering a brokerage option, usage of the feature is zero.

Here’s a rundown of 1,900 DC plans with more than 3.6 million participants recordkept by Vanguard. Eight in 10 plans offer a brokerage feature and permit participants to invest in any investment option. One in five plans restricts the brokerage feature to mutual funds only.

Half the plans do not limit or cap the proportion of the participant account balance that can be invested in the brokerage option, while half the plans do impose some limit or cap. The most common cap is 50% of the participant balance.

Twenty-two percent of plans with a brokerage window were law firms—and on average 7% of law firm plan assets were invested in brokerage windows, according to Vanguard’s data.

On average, those participants who use the brokerage feature invest 45% of their account balance in the brokerage option. The allocation to brokerage varies from 10% or less (18% of brokerage participants) to more than 90% (15% of participants). Larger plans are somewhat more likely to offer the brokerage option. However, smaller firms have a higher proportion of plan assets invested in the brokerage option.

What do brokerage participants invest in? Nearly all brokerage participants (94%) hold some cash in their brokerage account. The most common holding—more than half of brokerage participants and assets—is a mutual fund, followed by stocks. One in five brokerage participants holds an exchange-traded fund (ETF).

The most commonly held individual stock is Apple Inc., followed by Berkshire Hathaway and Bank America Corporation. The most commonly held ETF is Vanguard Dividend Appreciation ETF, followed by Vanguard Total Stock Market ETF and Vanguard S&P 500 ETF. Participants are also able to choose non-Vanguard mutual funds and ETFs.

Other findings are:

• 80% of brokerage participants are male
• Median account balance of brokerage participants: $262,446
• Median account balance of all participants: $29,603

A link to Vanguard’s findings is here.