Indeed, utilization of the brokerage option tends to rise along with income: Among people making $100,000 or more, some 10 percent used them in 2010, says Aon Hewitt, and their total 401(k) balance averaged $200,000, about three times the average 401(k) balance.
A common objection to self-directed 401(k) accounts is that the average investor isn't equipped to make sound choices. Performance data are hard to come by, but a 2005 survey reported by the Journal of Pension Benefits suggested that almost half of plan participants don't feel competent to invest on their own and prefer to rely on a professional. Even sophisticated participants, the study showed, were reluctant to use self-directed accounts.
Perhaps with good reason. The same article, citing a survey of self-directed accounts maintained by Lexington, Ky.,-based Unified Trust, and using 2002-03 data, showed that 76 percent of their account returns underperformed the S&P and 72 percent underperformed the core-fund model for their respective plans, by an average of 4.7 percentage points after fees. Unified Trust CEO Gregory Kasten, who authored the report, says the underpeformance rate has been fairly consistent since then, averaging 3 percent to 5 percent below plan performance.
"Everything we looked at years ago continues to be true," says Mr. Kasten. "There will be some isolated pockets of success, but there are many more failures."
Schwab suggests that the self-directed option is best for people who are "comfortable making their own investment decisions" and who "can dedicate more time to managing their own investments"—not the exactly the profile of your average 401(k) participant. It's up to each brokerage whether it offers advice on self-directed accounts (Schwab doesn't). If not, your plan may allow you to hire your own adviser. In fact, that's one of the things you should probably do if you're not a professional fund manager and you're determined to use a brokerage window.
Other things include minimizing transaction costs by buying no-load funds and ETFs, which generally have lower expense ratios than mutual funds. And minimize trading. Numerous studies document the tendency of people to exaggerate their own investing competence, and to overtrade as a result. (Men tend to trade more than women, and to suffer more as a consequence). A broker would invite trouble for "churning" your account—that is, trading excessively to rack up commissions. Most people tend to be their own worst broker.
"It's human nature that they have a lot of emotional overlay," says Kasten, "so they will tend to be buying at market tops and selling at market bottoms."
Clarified on 06/18/2012: A previous version of this article suggested that 80 percent of all Schwab-administered 401(k) assets are self-directed. The percentage applies only to Schwab 401(k) clients whose plans allow self-directed brokerage accounts.