The exchange traded fund (ETF) 401(k) space is heating up as big name players, such as Schwab and TD Ameritrade, announce their entry into the field.
I recently caught up with Stuart Robertson, head of ING DIRECT’s ShareBuilder 401(k) unit, to talk about the accelerating growth of ETFs in 401(k)s.
ETF Trends: While ETFs in 401(k) plans is not a new concept – ING Direct’s ShareBuilder 401k has been offering ETF-based 401(k)s for the past 5 years – why is it that big, established players, such as Schwab, are just now looking into it?
Stuart Robertson (Stuart): There are a couple of things going on here that are creating a much faster move towards ETF-based 401(k) plans:
The impending Fee Disclosure legislation – this is expected to have the biggest impact in the small-, mid- and, to some extent, the large-company arenas where many employers may not be fully aware or entirely understand the fees and expenses in their plan. Participants are often paying two to three percent of their savings to cover costs and expenses associated with active management – we believe all-in participant expenses of one percent or less is fair and where the industry is headed.
ETFs, with their low-expenses, are a huge key in delivering a low-cost plan with potential for better rewards. More players are seeing the writing on the wall and getting in the game.
ETF Trends: What is the “Fee Disclosure” legislation mandate and when does it become an enacted law?
Stuart: The new rules (referred to as the 408(b)(2) rules after a section in the Employee Retirement Income Security Act of 1974) will remove confusion so employers can easily compare providers on business costs and employee expenses. This will enable employers to really focus on their service needs and determine if they’re getting a fair price on their plan.
For example, employers are also looking to reduce risks of offering a retirement plan to their employees. Controlling costs is one way and having a provider that takes on some of the investment fiduciary risks like we do is appealing and delivers real value for the price.
As of January 1, 2012, employers will have complete transparency into what they’re investing in. Many traditional players have felt that making the fees obvious to participants could deter participation, but employers are often unsure of these costs too. These days are numbered with this new layer of transparency.
ETF Trends: What are the benefits of using ETFs in 401(k) plans?