There has been some progress, but exchange traded funds remain just a sliver of the massive U.S. 401(k) market.
“As of June 30, 2014, 401(k) plans held an estimated $4.4 trillion in assets and represented nearly 18 percent of the $24.0 trillion in U.S. retirement assets, which includes employer-sponsored retirement plans (both defined benefit (DB) and defined contribution (DC) plans with private-sector and public employers),” according to the Investment Company Institute.
A market of that size represents a significant growth avenue for ETF issuers, but there is work to be done before ETFs earnestly penetrate the 401(k) market.
““ETFs are still a very, very small portion of the 401(k) market, but it’s certainly growing, and I expect the growth rate to increase,” said Jeremy Stempien, director of investments and retirement solutions at Morningstar Investment Management, in an interview with Pamela Yip of the Dallas Morning News.
There are some signs of progress for ETFs in 401(k) plans. In February, discount brokerage giant Charles Schwab (NYSE: SCHW) said it will bring the advantages of exchange traded funds to 401(k) retirement plans.
Schwab Retirement Plan Services, a unit of California-based Schwab, has launched a full-service 401(k) program based on low-cost exchange-traded funds, according to a statement issued by the firm. Schwab’s 401(k) ETF effort comes after the 2012 launch of Schwab Index Advantage, which provides workers with low-cost index mutual funds and personalized advice. [Schwab Debuts ETF 401(k) Effort]
Schwab Retirement Plans Services is making 80 ETFs from 11 providers available in its new 401(k) ETF platform. In addition to Schwab ETFs, plan participants can choose from ETFs offered by ETF Securities, First Trust, Guggenheim Investments, Invesco PowerShares, iShares ETFs, PIMCO, State Street Global Advisors, Van Eck Global, Vanguard and United States Commodity Funds.
TD Ameritrade (NasdaqGM: AMTD) has been offering ETFs to the 401(k) world for over three years, indicating that previous hurdles, including technological challenges, are falling by the wayside. [TD Ameritrade Solves ETF 401(k) Problem]
However, issuers and brokerage firms looking to increase ETFs’ presence in the 401(k) market face other issues.
For example, some of the largest U.S. mutual fund providers, some of which are also big-name ETF issuers as well, contend that many U.S. workers have access to low cost index mutual funds in their employee-sponsored retirement plans.
That is true, but the assertion is ignorant to the fact “a lot” and “many” are far different from “a vast majority” and “all.” Many workers are still afflicted with either limited fund choices, only high fee options or an unappealing combination of both. The fact is all workers deserve access to low fee products in their retirement plans, but all workers do not currently enjoy such access.
Then there is the maddening assertion that ETFs in 401(k) plans will turn everyone from paralegals to engineers to McDonald’s managers into day traders.
Remember that 25 years ago (ETFs did not exist in the U.S. then) critics also asserted updating 401(k) balances daily rather than quarterly would lead to increased trading. That never materialized and there is no empirical evidence to suggest that simply because a worker has the ability to trade his or her retirement account more frequently means they will exploit the opportunity. After all, those workers do have jobs to tend to. [Low Fees Suport ETF 401(k) Push]