How ETFs Could Break Into 401(k) Plans
June 18th 2012 at 2:06pm by John Spence
The chief executive of exchange traded fund provider FocusShares says the business will begin to make “significant inroads” in 401(k) plans as fees become more transparent.
However, some ETF experts think the financial products will have a tough time breaking into retirement plans due to administrative challenges and competition from traditional index funds.
FocusShares CEO Liik in an Ignites story posted Monday noted new regulations that go into effect in July will require plan sponsors to provide more disclosure on 401(k) account fees. [ETFs Eye 401(k) Industry]
“Of the $4.5 trillion in [defined contribution] plans, $2.5 trillion is invested in mutual funds … But we expect to see a greater percentage of those assets invested in ETFs in the coming years,” he said. “After all, most of the qualities that made mutual funds attractive 401(k) choices in the past, such as asset-class diversification, a wide array of investment choices, and easy-to-understand objectives, can be applied to ETFs.”
Yet Matt Hougan, managing director of ETF analytics at IndexUniverse, thinks there aren’t many incentives for 401(k) investors to choose ETFs.
“Some people are saying that ETFs are God’s gift to 401(k) investors, but really index funds are God’s gift to 401(k) investors,” Hougan said in a recent Reuters article. “If you can get a Vanguard index fund for five basis points in a 401(k) plan, why would you want an ETF.”
Aside from low fees, Liik said 401(k) investors may be drawn to ETFs for the full transparency of their underlying holdings, while most mutual funds disclosure quarterly with a lag.
ETFs also allow investors to trade during the day, but that feature is less important for long-term 401(k) investors.
“When fees become a focus, as they should, ETFs will have to be included in the mix. Yes, there are barriers that can hinder the growth of ETFs in DC plans,” Liik said. “For example, ETFs don’t offer fractional shares; they must be traded through a broker, which could lead to higher trading costs, and opening up the broker window could lead to investors’ acquiring any publicly traded product, including stocks and any ETF. Another obstacle: Multiple retirement plan recordkeepers are affiliated with mutual fund companies and may be reluctant to cede shares to ETFs. However, the industry is addressing many of these issues.”
The opinions and forecasts expressed herein are solely those of John Spence, 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.