How ETFs Are Edging Into 401(k) Plans
January 14th at 12:00pm by Tom Lydon
Retirement plans have been loath to incorporate exchange traded funds (ETFs), but ETFs are popping up in 401(k) retirement plans, albeit slowly; and still have a long way to go to catch up to mutual funds.
According to BlackRock, investors hold around $2 billion worth of iShares ETFs in 401(k) plans, and this figure suggests that total ETF assets in 401(k)s could be close to $4 billion, reports Ian Salisbury for The Wall Street Journal. Though far from the $1 trillion in 401(k) assets invested in mutual funds, ETFs have made some headway into retirement plans,which didn’t hold any ETFs just a couple of years ago.
Investors like ETFs and the investment vehicle’s low costs and flexibility – ETFs can change hands throughout the trading day, whereas open-end mutual funds can’t. Investors of ETFs tend not to incur the higher capital gains distributions seen in mutual funds. However, ETF tax benefits don’t mean as much in retirement plans since the plans don’t have capital gains taxes.
Still, the ETF industry argues that ETFs can help keep a retirement plan’s costs low. But 401(k) plans already have low-cost conventional index funds and don’t have much incentive to switch. Greg Porteous, director of BlackRock’s iShares 401(k) business, says that the ETF provider is now focusing on small plans with less than $50 million in assets – smaller plans are overseen by financial advisers who are often fans of ETFs.
Vanguard Group so far has no intentions of including ETFs in its retirement plans since the provider sees them as near-identical to its index mutual funds.
BrightScope is developing a system to rate 401(k) plans in an attempt to provide more information to help people better evaluate different retirement plans, writes Amy Feldman for BusinessWeek. The company’s focus is providing ratings based on quantitative factors and how well a plan is creating retirement income security for participants.
However, the start-up company is currently having difficulties sifting through all the data and at times unable to access data from institutional offerings. Retirement experts are also questioning BrightScope’s decision to not include other retirement benefits like pensions or profit-sharing plans. So far, BrightScope’s list of 401(k) plans is mostly made up of industries with a well-paid and stable workforce. High paid employees are more inclined to participate in retirement plans and contribute at higher levels, which also skews BrightScope’s ratings.
For more information on 401(k)s, visit our 401(k) category. Be sure to take a look at our 401(k) special report for a more in depth review.
Max Chen contributed to this article.
