Any stock broker account, usually with trades made online, is a self-directed account if the investor does her own research and picks the specific investments. The term self-directed brokerage account usually refers to a specific option in 401k and defined-contribution pension plans.
Typically 401k and other contribution-based pension plans offered participants a limited number of mutual funds or fixed return accounts for investment. In the late 1990s employer sponsored plans started to offer broader investment options through self-directed brokerage accounts.
If an employer pension plan has a self-directed options, participants invest in a wide range of stocks, bonds or precious metals.
Experienced investors can use the self-directed option to pick investments that may perform significantly better than the mutual funds offered in the plan.
Self-directed brokerage accounts will have higher fees and commissions than the typical 401k plan. Plan participants become more responsible for the performance of their invested retirement assets.
According to the Financial Planning Association, self-directed plan participants can significantly increase the risk in their retirement plans by focusing the assets on only a few stocks.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.