Many of the larger plan providers have shut down the idea of using ETFs on a 401(k) platform. The argument is that ETFs are not suitable for long-term retirement savings. On the contrary, lower fees could mean the difference between an okay retirement and a very nice one over the long-term.
One might think that large corporate plans have access to the lowest-cost mutual funds, stripping the price edge from ETFs. But there are several problems with this assumption:
- First, 12b-1s (operational expenses) and other “hidden” fees are often tacked on.
- Second, many of those mutual funds still have a focus on beating the market rather than tracking it.
- Third, just because the corporation qualifies for the lowest-cost share class doesn’t mean that’s what’s actually in the plan – corporations have to remember to review the funds and work with the provider if there are better share classes to be had.
- Lastly, professional managers have a difficult time at best trying to beat the indexes over the long-term. Corporations may still have access to the lowest-cost share classes, but they’re still mutual funds.
Putting ETFs to Work in Your 401(k)s
If you or your clients are looking to move an account, cashing out is a bad idea – you’ll get socked with hefty penalties if you’re below a certain age. Instead, consider an IRA rollover or an ETF-only 401(k) plan for your retirement.
Some financial advisors are recommending people to look at ETFs outside of clients’ corporate retirement plans as a low-cost way to round out investment portfolios. The assumption is that corporations offer better 401(k) plans because they have access to the best and lowest-cost products, but this isn’t always the case. Looking elsewhere for alternatives may be a better bet.
ETF-only 401(k) plans differ in some key ways from regular ETF investing:
- There are no transaction fees associated with some ETFs in 401(k) plans. Transaction fees are common in retail, but are not typical in 401(k) plans. The lack of transaction fees also makes 401(k) plans that use ETFs ideal for dollar-cost averaging – putting in smaller amounts over periods of time.
- 401(k) plans generally are geared toward long-term investing strategies, instead of more frequent types of trading. Although there’s freedom to make moves and changes, participants in 401(k) plans are largely buying and holding.
- In the retail space, you can choose between hundreds upon hundreds of ETFs. Not so with most 401(k) plans. Employers take on a fiduciary responsibility to offer the best available funds to their participants, and research shows the more options available leads to fewer people that participate in the 401(k) plan. Both drive the need for a focused lineup of funds in 401(k) plans.
Although ETFs in 401(k) plans might be relatively rare these days, there are several providers offering them, including: