Exchange traded funds have yet to make a dent in the trillion dollar 401(k) plan industry, dominated by mutual fund heavy weights. While new disclosure rules may help ease ETFs into more plans, there are some obstacles to overcome.
When the average employee understands more about performance and the fees they’re paying, you’ll start seeing more plan providers, especially smaller ones, include ETFs. But there are some plumbing issues in getting ETFs into 401(k) plans.
More notably, smaller 401(k) plans hold class A-shares mutual funds that have higher fees than ETF equivalents, reports Rachel Louise Ensign for The Wall Street Journal.
However, larger retirement plans include institutional mutual fund shares, which may cost less than some ETF offerings. As such, big plan sponsors, like Fidelity and Vanguard, have shied from offering ETFs in their 401(k)s.
“When ETFs were newer in the marketplace, we had plan sponsors looking interested in the product. They’ve begun to get more informed and understand the products better and understand the way that low-cost mutual funds serve the same purpose,” Beth McHugh, a Fidelity vice president, said in the article.
Additionally, mutual funds are traded as one at the end of the day through a clearinghouse, which charges next to nothing. ETFs, though, are traded through a brokerage firm, which incur commissions on per-share basis. As it stands, the intra-day tradability of ETFs leaves plan participants with higher commission fees.