Which 401(k) Plans Incorporate ETFs?
December 15th 2008 at 6:00am by Tom Lydon
While there are still cries for exchange traded funds (ETFs) to be a regular feature of 401(k) plans, one company is already enthusiastically incorporating them.
ING Direct’s ShareBuilder 401(k) plan focuses on small businesses of 1-50 employees. ShareBuilder actually launched its 401(k) plan in November 2005, and ING Direct took it over when they bought the company in November 2007.
Since ING Direct’s mission is to help lead Americans back to saving, it seemed like a good fit, says Stuart Robertson, head of ING Direct’s 401(k) unit.
“90% of small businesses with less than 50 employees don’t have a 401(k) plan – we can help people get their first 401(k) plan,” he says. ING’s mission is also about affordability, and ETFs seemed to fall in line with that philosophy.
But when the 401(k) was created, the decision to go with an all-ETF platform was not made willy-nilly: a number of different types of investment tools were considered before they saw that historically, indexing holds up better because of the lower expenses. They then looked at index mutual funds vs. ETFs and saw that ETFs come with even lower expense ratios.
“We knew we could put out a low expense product and eliminate transaction fees that will hopefully allow returns to be stronger over time,” Robertson says.
ETFs have yet to get the same share of the 401(k) market that mutual funds have, but there is plenty of time for this to happen.
At the end of 2007, $3 trillion in assets was held in 401(k)s; $1.7 trillion of that was in mutual funds. Seeing what a boon the 401(k) market has been to the mutual fund business, the ETF side naturally wants a piece. The mutual fund market share of the 401(k) market has ballooned from 9% in 1990 to about 55% at the end of 2007, the Investment Company Institute (ICI) says.
The ShareBuilder 401(k) comes with a 16-fund lineup, which might seem spare. But Robertson points out that when you begin offering more than that, it becomes overwhelming and confusing. “Studies have shown that the more options you give, participation starts to drop off.”
Money markets, Treasury Inflation Protected Securities (TIPS) and broad equities are represented. There are also five model portfolios, as Robertson notes that participants often make mistakes when it comes to asset allocation.
The five portfolios range from “stable,” which are heavy in low-risk investments, such as bonds, to aggressive, which is mostly allocated in large-cap growth and value funds. Most of the ETFs offered are from the iShares and SPDR families.
As new ETFs hit the marketplace, Robertson says that ShareBuilder probably won’t alter their plans much, since it’s felt that a good cross-section is represented as it is.
Robertson also notes something completely unique about their 401(k) plan: it’s the only one where you can go through all the steps of enrollment and never talk to anyone. He points out that it speaks more to the power of the technology they employ and the ease of the system’s use than anything else. Enrollment is also 100% paper-free.
ETFs are finally starting to make some headway into 401(k) plans, and there are some other all-ETF 401(k) plans out there available now. There’s one offered by iShares, consisting entirely of the world’s largest ETF provider’s funds. WisdomTree also has all-ETF 401(k) plans.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.