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I would like input on the legality of options trading in 401k plans by the Trustee. Schwab tells me margin is not permitted in 401k accounts and that limits the level of trading authorization a trustee can obtain and use. Any input on this subject would be much appreciated, and knowledge of other brokers who might not share this position, if it is legal.
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There are two considerations here. First, it is a "prohibited transaction" for a "party in interest" to extend credit to a plan (with some limited exceptions). Parties in interest include the employer, employees, certain relatives of them, fiduciaries to the plan (including the Trustee), service providers (the recordkeeper, custodian, etc.) and others. So, Schwab is avoiding the prohibited transaction as Schwab as broker and service provider to the plan (and maybe Trustee) cannot extend credit (margin) to the plan to effectuate those kinds of trades.

Second, the plan fiduciaries are held to a standard of "prudence" with respect to managing the plan and its assets (even if the plan assets are invested at participant direction). Technically, *all* of the assets of a plan (not just the balance of one participant) *must* be available to pay the liabilities of the plan. So, if something goes awry with one participant's account investments that create a liability, everyone else could (theoretically) suffer a loss. Hence, certain restrictions on what a participant (or Trustee - even if directed by the participant) may do.
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thinkfirst100,

You wrote, I would like input on the legality of options trading in 401k plans by the Trustee. Schwab tells me margin is not permitted in 401k accounts and that limits the level of trading authorization a trustee can obtain and use. Any input on this subject would be much appreciated, and knowledge of other brokers who might not share this position, if it is legal.

I'm not aware of a rule preventing margin in a 401(k) account - only in an IRA. But I'm also not personally aware of any 401(k) providers that offer margin. Many brokers do offer limited options trading without margin in their various retirement account products. As long as the broker can ensure there is no chance exercising the option would result in a loan against other assets, they should be able to offer options in an IRA (or 401k). But just because they can doesn't mean most 401(k) providers do even that.

Also the selection of a 401(k) trustee is handled by your employer. If your employer selected Schwab, you would need some pull with their benefits group to get the 401(k) trustee changed. Of course if you are your own employer, you can always set up a Solo-401(k) wherever you want.

- Joel
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You can trade options, just not options that require margin.

For example, you can sell covered calls and buy puts in an IRA. There is no reason that I am aware of that prohibits such in a 401k - it is just that the vast majority of 401ks offer funds and not individual stocks.
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Thank you. Great input.
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Thanks Joel. Great input.
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Thank you. You have it nailed and I am getting started.
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