NEW YORK (Reuters) - Low-cost exchange-traded funds are a favorite of individual investors. ETF assets reached $2.9 trillion in 2017, up 32 percent in the last year, according to Investment Company Institute, a trade group.
So why are so few ETFs offered in workplace retirement plans?
Of the $5 trillion in assets in company-sponsored 401(k) plans, two-thirds are held in mutual funds, the ICI says. ETF assets, meanwhile, are a mere fraction of the pool left over, with the exact percentage not tracked publicly.
Among retail investors, ETFs are favored for tax efficiency, intraday trading and cheap fees. There are more than 2,000 varieties available in the U.S., ranging from plain-vanilla S&P indexes to niche offerings like an ETF that follows whiskey and spirits company stocks.
In a tax-advantaged 401(k) plan, where investors are in it for the long-haul, those advantages matter less. Many retirement investors do not understand the differences between ETFs and mutual funds.
Research shows that investors do better in managed accounts, rather than selecting their own funds, says Steve Anderson, president of Schwab Retirement Plan Services.
Most managed target-date funds, which are geared toward a particular retirement date, are mutual funds.
One hurdle has been technological. ETFs trade throughout the day, while mutual funds do not; mutual funds are typically priced on a daily basis at 4 p.m. Adding ETFs to a retirement plan means a change in record-keeping systems.
ETF shares are also sold whole. But investors usually buy fractional mutual fund shares in a retirement plan, which are better for handling the random-dollar, bimonthly contributions most employees make to retirement accounts.
Dan Egan, director of behavioral finance at the online investment company Betterment, says that one thing that is stopping other providers from switching from mutual funds to ETFs is how they are paid - partly by commissions from mutual fund companies.
“It puts them in an awkward place. If they start offering ETFs, without the revenue, they’d need to start charging more for the service itself,” Egan says.
But it is possible to invest in ETFs in your 401(k), and some providers have forged ahead in the last five years.
Vanguard, one of the largest money managers in the U.S., says it has does not have much demand for ETFs in retirement plans, but it does have an offering through its Vanguard Retirement Plan Access, which is for small businesses.
Charles Schwab has been offering an all-ETF product called Index Advantage since 2012. While it is just a small portion of the firm’s overall 401(k) business that it declined to specify, the company is bullish on future prospects. The plan design opts-in participants and offers them a low fee-structure of under 10 basis points. The plan also offers low-cost advice. That’s cheap compared to a traditional mutual-fund based 401(k) which costs about 50 basis points, according to ICI.
At Betterment, the ETF options come in the Betterment for Business 401(k), which now has a waitlist for small companies wishing to add the platform.
For a company deciding among offerings, one key is to consider your objectives, says Steve Schweitzer, senior vice president of product and marketing at Ascensus, a provider of 401(k) plans.
If your company does not offer ETF options and you want them, see if your plan offers a brokerage window within the 401(k). That would allow the participant to trade whatever they want, at their own risk.
(This version of the article corrects the fee structure for Schwab’s plan to show it charges separately for advice and that advice is not included in the 10 bps fee in paragraph 14,)
Editing by Lauren Young and Bernadette Baum
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