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.