If your plan sponsor offers a self-directed brokerage window, should you use it? To help answer this question, here are some ideas to keep in mind.

How Self-Directed Brokerage Works
With more freedom comes added responsibility. After choosing how much you want taken out of your paycheck and deciding on your asset allocation, the typical 401(k) participant flies on autopilot. But if you're using your plan's self-directed brokerage option, there are some added steps you'll need to take. You'll have to set up a brokerage account with your provider and set aside at least a portion of your assets in your plan's money market fund. After doing so, you'll transfer the cash to the brokerage account, where you're free to buy funds outside your plan, stocks, ETFs, and other investments. Just as with any brokerage account, you'll pay commissions when you buy or sell stocks or ETFs. Fund investors can avoid commissions by sticking with offerings on their brokers' no transaction fee, or NTF, platform. Big providers such as Vanguard, Fidelity, Charles Schwab, and T. Rowe Price often have thousands of funds available to investors without having to pay an additional fee (you'll have to pay a commission if you venture outside the NTF platform, however).

Good Reasons to Use Self-Directed Brokerage
It could make sense to venture outside your plan if your lineup is fraught with funds with poor long-term records or high expenses. You might be able to find some good choices in your plan, such as an S&P 500 Index fund, and then use your brokerage option to fill out the rest of your portfolio, focusing on those with strong long-term records, experienced management teams, and moderate costs.

You might consider bellying up to your provider's brokerage window if your plan leaves you with gaping holes in your portfolio. As I've seen with my friends, many plans leave participants underexposed to small-cap and foreign stocks. If that's an issue you face, then using your directed brokerage option could make sense. If you're a Premium Member of Morningstar.com, our list of Fund Analyst Picks is a terrific starting point for finding worthwhile options.

The self-directed brokerage option is also a way to access more-esoteric asset classes like real estate, commodities, and micro-caps that aren't present in many 401(k) plans--even good ones. While Morningstar's plan gives participants broad exposure to small caps with T. Rowe Price Small-Cap Stock (NASDAQ:OTCFX - News), it doesn't offer anything providing pure micro-cap exposure. My fellow fund analyst Todd Trubey wanted to have long-term exposure to micro-caps so he scooped up Bridgeway Ultra-Small Company Market (NASDAQ:BRSIX - News) through our plan's brokerage platform. Keep in mind, though, that micro-caps, like real estate and commodities, have reaped outsized gains in recent years, so you shouldn't delve in expecting them to post similarly impressive results in the near term. And although these areas are effective portfolio diversifiers, they're best held in small doses (5% of your portfolio or less).

Some investors, like many Morningstar equity analysts, avoid funds all together and build their own stock portfolios. Because capital gains aren't taxable in a 401(k), the analysts will buy stocks they expect to hold for shorter time frames through the self-directed brokerage option (though they're careful to avoid trading too much given our plan's relatively pricey commission charges). It's worth noting, however, that the stock analysts live and breathe company balance sheets and income statements all day long. Most of us don't have the time or wherewithal to follow companies as closely, so it's easier and probably safer to get diversified stock exposure through funds instead.

Why You Shouldn't Use Self-Directed Brokerage
Just because you have freedom doesn't mean you have to use it. Despite its availability, I haven't used Morningstar's self-directed brokerage option. Fortunately, Morningstar's fund lineup is rock solid and well diversified, so I don't see any reason to invest outside it. I like to keep my investing life simple, and I'd rather not add to the list of funds that I have to keep tabs on. And if I stick with the funds in Morningstar's plan, it's far easier to dollar-cost average by making regular investments. After setting up my asset allocation, our plan provider does the rest of the work. But to dollar-cost average through my 401(k) plan's brokerage window, I'd have to first transfer money to my money market account every time I'm paid so I could invest just as regularly as I would have had I just stuck with my plan's preexisting options. That's just one logistical hassle I'd rather not deal with.

Indeed, one huge advantage of the typical 401(k) plan is the autopilot aspect of it. It simply makes good investment sense to invest small sums at regular intervals. Doing so enforces discipline and helps you resist the usually harmful temptation to chase hot returns. Instead, you're buying more shares when the markets are down and fewer when they're up, a potentially more fruitful strategy than trying to time the market. Most investors (and I put myself in this camp) don't have either the time, energy, or discipline to make regular investments. When one of the virtues of 401(k) investing is supposed to be simplicity, why complicate matters?

Many of my colleagues use our directed brokerage option to buy stocks. But with our plan giving me access to great stock-pickers like Selected American's (NASDAQ:SLASX - News) Chris Davis and Oakmark Select's (NASDAQ:OAKLX - News) Bill Nygren, I'm not so sure I can do better. Plus, my plan charges $19.95 to execute stock trades, so it's not cheap to buy and sell stocks, especially in small amounts. And while Morningstar is nice enough to pick up the annual $75 per employee cost of setting up a self-directed brokerage account, most employers aren't so generous. Costs are one of the few things in investing you can control, so try to keep them to a minimum.

Additional Considerations
Bellying up to your 401(k) provider's brokerage window isn't the only way to cope with an overly narrow or simply lousy plan. You should stash enough in your 401(k) to take advantage of your employer's matching contribution, but it might be smarter to make up for your plan's shortcomings by investing in other tax-protected vehicles like a Roth IRA. A Roth functions differently than a 401(k) account because you fund it with aftertax dollars. By contrast, you contribute pretax dollars to your 401(k) and pay taxes on your earnings when you make withdrawals from your account. Roths have the advantage of added flexibility (you don't have to start making withdrawals at age 70.5, for example) and are a good idea if you think you might be in a higher tax bracket when you retire. For a much more detailed discussion on the pros and cons of contributing to a 401(k) versus the Roth alternative, click here.

Finally, if you choose to go outside of your 401(k) plan, remember to make sure you're really adding value. If your plan's funds outperform your own choices over the long haul, then perhaps using your brokerage option isn't worthwhile. Don't use your added freedom to shoot yourself in the foot.

Christopher Davis does not own shares in any of the securities mentioned above.