Exchange traded funds (ETFs) offer a variety of benefits as an investment vehicle. They generally have lower fees than most mutual funds, offer tax advantages and can trade like stocks, and, thanks to an ongoing price war, commissions on trading them are lower than ever. There’s just one big market left to really crack: the 401(K) market.
The majority of 401(k) plans are very different from ETF-based 401(k) plans. The traditional 401(k) plan is made up of mutual funds that focus on U.S. stocks and bonds, and international stocks from developed nations. These categories are limiting, not to mention expensive. These higher expenses would be fine if evidence supported that actively-managed funds were consistently outperforming the indexes. But overall, they’re not. ETF-based 401(k) plans are almost universally taking an index-based approach to investing.
Take the Facts Over the Myths
Despite the fact that most investors would be better served with them, ETFs in 401(k)s aren’t catching on as quickly as some feel they ought to. Some advisors complain that the advantages funds offer get lost inside 401(k)s and that ETFs can bring technical headaches for the companies that manage the plans. However, many plan providers have argued that those problems cited aren’t that big of a deal and their plans are evidence of that fact.
Another frequent argument against ETFs in 401(k) plans is the charge that investors won’t be able to take advantage of the intraday liquidity of ETFs. The facts show that this is more or less a non-issue, since most 401(k) plan participants only log in a couple times a year – they’re hardly day trading.
Additionally, a few advisors see that investors typically won’t be able to take advantage of ETFs’ ability to trade all day long rather than just once a day, as is the case for mutual funds, but this fact is more of a non-issue because the majority of plan participants don’t log in more than a few times each year and don’t consider intraday trading.