It’s true that an increasing number of 401(k) plans are offering ETFs, but this is hardly the norm. Most still use high-priced and opaque mutual funds. Anyone who understands the benefits of ETFs might be scratching their heads over this.
The industry has long claimed that putting ETFs into 401(k) plans might make them more expensive and difficult to operate, since mutual funds are only traded once a day at the end of the day. ETFs are traded intraday, just as a stock would be. The technology didn’t exist, was the claim. Fund companies also claimed that there wasn’t enough of a demand for ETFs to be incorporated into 401(k) plans. The chart below illustrates how the ETF industry has grown in recent years, though:
(Chart courtesy of State Street Global Advisors)
The ETF industry is hungry for this piece of the market. At the end of 2007, 401(k)s had about $3 trillion in assets, and $1.7 trillion of that went to mutual funds. Naturally, the ETF side of things wants a share.
But these days, there are a number of plans that are blasting that myth:
- Darwin Abrahamson, the CEO of Invest n Retire, has been doing this for years. His proprietary system helped stick a fork on the notion that ETFs and 401(k)s were like oil and water.
- iShares has the iShares 401(k) Program, which was designed to assist financial advisors who want to have ETFs as standard options in their 401(k) plans. The program identifies administrative providers and networks that offer competitively priced access to ETFs.
- ING Direct’s ShareBuilder 401(k) program is targeted toward small businesses with 1-50 employees. The plan has been around since November 2005, but ING took it over in November 2007. ING’s plan comes with a lineup of 16 funds, which might seem small, but the idea is to keep it simple. Offering more than that, they feel, simply becomes confusing for investors.
- The owner of Lafayette Copier Sales & Service Inc. in Lafayette, IN, had been using a 401(k) plan that only offered mutual funds. But earlier this year, the plan’s service provider worked out a system that allows participants to create their own portfolios and freely transact any iShares ETF on the market.
These aren’t the only plans offering ETFs, either; those who offer them are appearing on the scene with increasing frequency. More employers, in fact, are making it easier for workers in 401(k) plans to own ETFs, but it’s not a change that is going to happen overnight, says Eleanor Laise for The Wall Street Journal.
But even some big players in the industry are betting on a shift in tide for the stodgy 401(k) market. BlackRock Inc. last month noted the potential for growth index funds have in retirement plans. Ascensus Inc., a 401(k) record keeper, says it has gotten more than 100 inquiries from employers since they added ETFs to their platform in May.
And in a survey of 150 employers by Hewitt Associates, 17% said they’re likely to replace some or all of their plan’s actively managed options with index funds. That figure is up 8% from just a year ago.
This, combined with the fee disclosure bill, could help both employers and employees recognize that index funds can deliver better returns at a lower cost.
Making the Most of Your Current 401(k) Plan
While the use of ETFs within 401(k) plans is clearly growing, the push is not over yet. If your employer doesn’t currently offer a 401(k) plan that incorporates ETFs, you’re not completely helpless. Two things you can do right now to make it happen are:
1. Tell your employer that’s what you want. Many people are still learning about ETFs. Unlike mutual funds, they’re not exactly a household name. Perhaps your employer simply doesn’t know about them. If that’s the case, give an education or pass along some resources. But let your employer know that you want them. Encourage your colleagues to ask, too.
2. Let your congressperson know you support legislation to bring more clarity and sanity into 401(k) plans when it comes to both fees and options within them. Advocate not just for yourself, but for millions of other Americans who deserve something better for their futures.
The squeaky wheel, after all, will get the grease. In the meantime, though, there are still ways that you can be sure you’re getting the most out of your 401(k) plans while you wait for some ETFs.
- Save, save, save. Undersaving has always been a major problem, but in these hard times it seems to be prevailing. Dwindling down some of your wants and desires to needs may enable you to save a few more pennies and get you over that bump.
- Utilizing company matches. This may be difficult because many employers are decreasing or even eliminating this policy. If this is the case, up your contribution to the maximum that the IRS will allow, $16,500 per individual for the current year and $22,000 for those of you 50 and older. Not only will this boost your nest egg, it will lower your contribution to Uncle Sam’s pocket.
- Know the rules of your plan. Depending on your plan, there can be rules that can be costly if they’re broken. Some of these limits include the length of time you must hold a fund or limits on how often you can trade per year.
- Pay attention to fees. This is one area that would really reap the rewards if ETFs were routinely included in plans. The majority of 401(k)s are focused on mutual funds, which generally have an expense ratio of around 1.02%. Know what you’re paying.
- Encourage workers to save. Many companies don’t offer 401(k)s because of hefty costs and administrative issues and many workers that do have access to 401(k)s simply don’t utilize them. Perhaps the government can make it a bit easier for small business to offer 401(k)s.
Do you know of a 401(k) plan that offers ETFs? Feel free to share it in the comments and let others know!
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