Recognizing when clients may benefit from the flexibility of a Self-Directed Brokerage Account.
Target date funds have become the default investment choice for millions of retirement plan participants. Their growth has been fueled by their status as Qualified Default Investment Alternatives (QDIAs) and by a simple reality: most participants do not have the time, interest, or expertise to build and maintain a diversified retirement portfolio on their own.
While target date funds work well for many participants, they are designed for broad populations rather than individual circumstances.
As clients accumulate wealth, approach retirement, or develop more sophisticated planning needs, the limitations of a one-size-fits-all approach can become more apparent. Yet many advisors overlook a powerful tool that may already be available within the retirement plan: the Self-Directed Brokerage Account (SDBA). Potomac helps advisors serve clients with more complex retirement planning needs by bringing professionally managed, risk-aware, tactical investment strategies to SDBAs. These unique strategies empower advisors to deliver more personalized guidance within qualified retirement plans.
When One-Size-Fits-All Investing May Not Be Enough
The success of target date funds comes from their simplicity. Participants receive professional management, diversification, and automatic rebalancing through a single investment option.
What they do not receive is personalization.
A target date fund generally adjusts investment risk based on age and an expected retirement date. However, two participants of the same age can have dramatically different financial situations. One may have most of their wealth in the employer-sponsored plan and benefit from the simplicity of a target date fund. Another may have significant assets outside the plan, unique retirement income objectives, concentrated stock holdings, or a risk tolerance that differs from the assumptions built into the fund's glide path.
Rather than viewing target date funds as the final answer, advisors should view them as a starting point for deeper conversations.
A deeper review may be appropriate when clients:
Have significant assets outside the retirement plan
Accumulate large retirement plan balances
Approach retirement and begin focusing on income planning
Desire more control over investment decisions
Seek investments unavailable in the plan's core lineup
Want retirement assets coordinated with a broader household portfolio
Have risk preferences that differ from a typical age-based allocation
These factors do not automatically mean a client should move beyond a target date fund. Rather, they are signals that greater customization and investment flexibility may deserve consideration.
Three Common Client Profiles That May Warrant an SDBA Conversation
The High-Net-Worth Investor
A client with significant retirement plan assets often has substantial wealth outside the plan as well, including taxable investments, company stock, business interests, or other assets.
While a target date fund can effectively manage assets within the retirement account, it cannot account for the client's broader financial picture. In these situations, an SDBA may allow the advisor to integrate retirement plan assets into a more coordinated investment strategy while maintaining professional oversight and risk management.
The Investor Nearing Retirement
As retirement approaches, participant concerns often extend beyond accumulation.
Income generation, withdrawal planning, downside risk management, and sequence-of-returns risk become increasingly important. While a target date fund provides an age-based allocation framework, an SDBA may offer greater flexibility to implement a portfolio aligned with the client's specific retirement goals.
The Investor Seeking More Than the Default
Some clients want greater involvement in how their retirement assets are managed.
They seek broader investment choices, ask more sophisticated portfolio questions, and want retirement assets managed with the same level of attention as the rest of their wealth.
While these profiles represent different investor needs, they share a common theme: the participant's circumstances have evolved beyond what a standardized investment solution was designed to address. In these situations, an SDBA may provide a framework for bringing greater portfolio customization, risk management, and advisor oversight to retirement plan assets.
Where SDBAs Can Add Value
An SDBA expands the investment choices available within a retirement plan beyond the plan's core menu. More importantly, it allows advisors to bring the same level of portfolio construction and financial planning to retirement assets that they often provide for taxable accounts and IRAs.
For clients whose needs extend beyond a standardized glide path, an SDBA can support:
More customized asset allocation
Broader investment opportunities
Better coordination with assets held outside the plan
More precise risk management and portfolio oversight
Greater flexibility in retirement income planning
A more integrated household investment strategy
The key point is that an SDBA is not simply about providing access to more investments.
Its value comes from combining expanded investment flexibility with professional advice and portfolio oversight. The goal is not more choices for the sake of more choices, but the ability to better align retirement assets with a client’s objectives, risk profile, and overall investment strategy.
Target Date Funds and SDBAs: Key Differences
While target date funds and SDBAs can both play important roles within a retirement plan, they are designed to address different participant needs. The following comparison highlights some of the key distinctions.
Table 1. Comparing Target Date Funds and Self-Directed Brokerage Accounts
Consideration | Target Date Fund | Self-Directed Brokerage Account |
Investment Approach | Professionally Managed Glide Path | Participant-directed with Advisor Guidance |
Asset Allocation | Standardized, Age-based | Customized Client Circumstance |
Investment Selection | Single Diversified Fund | Expanded Investment Universe |
Portfolio Personalization | Limited | Greater Flexibility |
Coordination with Outside Assets | Limited | Greater Integration Potential |
Retirement Income Planning | Generalized Approach | More Customizable |
Primary Benefit | Simplicity and Automation | Flexibility and Personalization |
Best Fit | Many Participants | Clients with More Complex Needs |
The purpose of this comparison is not to position one approach as superior to the other. Rather, it illustrates how target date funds and SDBAs are designed to address different participant needs.
Evaluating Whether an SDBA Is Appropriate
While these scenarios can signal opportunity, they do not automatically mean a client should move beyond a target date fund. The key question is whether greater flexibility would allow the advisor to better align the client's retirement plan assets with their overall financial goals and circumstances.
A target date fund may remain appropriate when a client's needs are well served by a diversified age-based allocation and limited portfolio customization. An SDBA deserves consideration when greater flexibility would allow the advisor to better integrate retirement plan assets into the client's overall financial plan.
Advisors can evaluate SDBA suitability by focusing on three key questions:
Has the client's financial situation become more complex?
Significant assets outside the plan
Multiple accounts or asset types
Tax, estate, or legacy planning considerations
Concentrated stock positions or business interests
Do the client's objectives extend beyond a standard glide path?
Customized risk preferences
Retirement income needs
Greater investment flexibility
Portfolio strategies unavailable through the plan’s core menu
Would a more personalized strategy improve outcomes?
Values personalized advice
Wants portfolio oversight
Seeks coordination across household assets
Desires a more holistic wealth management strategy
When the answer to these questions is yes, an SDBA may provide the flexibility to implement a more personalized strategy while allowing the advisor to integrate retirement plan assets into a broader financial planning relationship.
The Advisor's Role
The opportunity for advisors is not to replace target date funds. For many participants, they remain an effective and appropriate solution.
Rather, the opportunity is to identify clients whose financial circumstances, investment objectives, or retirement needs have evolved beyond what a standardized glide path was designed to address.
While plan fiduciaries determine whether an SDBA is available within a retirement plan, advisors play a different role. By understanding a client's goals, assets, risk tolerance, income needs, and broader financial picture, advisors can evaluate whether greater investment flexibility may improve alignment between retirement plan assets and the client's overall financial plan.
In many cases, the value of an SDBA is not the expanded investment menu itself. It is the ability to combine those expanded choices with professional guidance and ongoing portfolio oversight tailored to the individual client.
Advisors do not have to navigate this process alone. Potomac can help advisors evaluate portfolio construction options, implement tactical risk-managed investment strategies within SDBAs, and support ongoing oversight of retirement assets while those assets remain within the qualified retirement plan.
Conclusion
Target date funds remain an effective solution for many retirement plan participants. However, they are designed for broad populations rather than individual circumstances.
As client needs become more complex, advisors have an opportunity to determine whether a more tailored approach could better align retirement plan assets with a client’s goals, risk profile, and overall financial objectives.
For those situations, an SDBA may provide a way to bring professional portfolio management and risk oversight to assets that remain within the retirement plan.
To learn more about how SDBAs can fit into a retirement planning strategy, contact Potomac or visit Potomac.com/SDBA.
