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How to Buy Low-Cost Exchange-Traded Funds (ETFs) in Your 401k

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This video shows investors how to place a trade in their brokerage account to buy exchange-traded funds (ETFs).

How to Buy Low-Cost Exchange-Traded Funds (ETFs) in Your 401k

In this video we will be reviewing how to use your brokerage account within your 401k plan.

The brokerage account option is becoming more popular among retirement plan participants because of its ability to allow you to purchase a wider range of investment options which aren’t typically available as fund choices within your 401k plan.  This includes exchange-traded funds, also known as ETFs, which have very low expenses that can translate to saving you thousands of dollars over time.

In order for you to access a brokerage account your retirement plan provider must offer a brokerage account option as part of your retirement plan.  Your employer decides whether your brokerage account will allow you to buy, only mutual funds, mutual funds and ETFs, or any available investments including stocks and bonds.

Your plan may offer you a brokerage account option at no cost or you may pay a nominal annual service fee to have access.  Either way, you will have to pay a transaction fee on trades you place.

ETFs trade like stocks, so they qualify as “equity” trades, which tend to be a lower transaction fee when compared to the transaction fee for buying mutual funds.  The typical equity trade is between $8-10.

So how does the brokerage account option work?

Let’s review an example by purchasing an ETF. Placing an order to buy an ETF using your brokerage account associated with your 401k plan first involves logging in to your 401k the way you would normally to view your account.  After logging in to your 401k you should be able to access your brokerage account option by clicking a link.  This will bring up a separate window inside your 401k .  This is why the brokerage account option is sometimes referred to as your “brokerage window”.

Although the brokerage option is linked to your retirement plan it works like a separate account.   You can then decide how much money to transfer into your brokerage account within your retirement plan.

(See screen shot in video version)

So let’s place a trade.

In this example, we will be using Charles Schwab’s brokerage platform.

To access the screen to place an order to buy or sell an ETF click on the TRADE tab, then select “Stocks & ETFs” to open the order entry window.

In this demonstration – we will be buying – the Vanguard S&P 500 Index ETF.  Before placing a trade – there are two pieces of information – you need to know:

1st is the symbol of the fund (also called the ticker symbol)

2nd is the number of shares that you wish to buy or sell

For future reference, when you select a model portfolio at RetirementInvestor.com you will be given all the symbols for all the ETFs that comprise the model portfolio you are building, as well as the number of shares you need to purchase for each fund based on the total dollar amount you are investing.

Starting on the Enter Order tab. The first step is to enter the symbol for the fund. The symbol for the Vanguard S&P 500 Index ETF is VOO.  Next, click the ACTION drop-down arrow. This is where you can choose to Buy or Sell this fund.  Since we are purchasing this fund, click on BUY.  Next enter the number of shares you wish to purchase.  Again, this will be calculated for you at RetirementInvestor.com.

In this example let’s buy 30 shares.

Below the Quantity field is a check box called Reinvest Dividends.  By checking this box, any dividends paid by the fund may be reinvested back into the fund by buying addition shares even if they are fractional shares. Next, go to Order Type and click the drop-down button.  My suggestion is to always select Market Order.   A market order means you want to buy this fund now at the best available price you can get.   This means your order is likely to be filled immediately, assuming you are placing the order during normal market hours which are between 9:30am to 4:00pm EST.   It’s best to place your order – when the market is least busy.  So if possible avoid placing your order during the first and last hour of the trading day.  After selecting Market Order the estimated dollar amount of the order is displayed. And lastly, under the “Timing” field you will notice is says “Day Only”. This is the default for Market Orders.  It means if the order is not filled by the end of the trading day the order will expire.

The next step is to REVIEW your order. Click the Review Order button.

This will bring us to the Verify Order tab.  It’s here that you verify all your order information is correct. If everything looks correct click the Place Order button.  Once our trade is placed, you will see an acknowledgement that your “Order was Received”.  From here you can click “Place Another Order” to buy another fund or you can click on “Order Status” to see if your order has been filled. To purchase another fund simply click on “Place Another Order” link.  This will bring up your Order Entry window again so you can buy your next fund and repeat the process.

So that’s it – not too painful.

Just remember, the two pieces of information you’ll need to place an order is the symbol of the fund and the number of shares you wish to purchase both of which you can easily print out when using the Build My Portfolio calculator at RetirementInvestor.com.

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