Like many things during the early days of the Trump administration, the future of the U.S. Department of Labor’s fiduciary rule is up in the air. Related to that, and for other reasons, the future role of exchange-traded funds in retirement accounts is also up in the air.
The DOL rule, which requires financial advisors to act as a fiduciary when handling retirement accounts such as 401(k)s, is set to fully go into effect in April. At least that’s the plan, pending whether the rule will be watered down or completely nixed as part of Donald Trump’s drive to undo Obama-era regulations.
“We’re all hoping for a delay,” said Dalia Blass, counsel in the investment management practice at Ropes & Gray, who spoke on Tuesday during a panel discussion at the Inside ETFs conference in Hollywood, Fla.
With or without the DOL rule, the markets are clearly moving toward more transparency, simplicity and lower costs, as represented by the continued asset outflows from mutual funds and inflows into ETFs, said Elisabeth Kashner, director of ETF research at FactSet.
“Although this rule specifically applies to retirement accounts, in reality it will apply to all accounts because it will be difficult for financial advisors to explain to clients why they’re a fiduciary here but not a fiduciary there,” Kashner said. “That’s why it’s such a dramatic change for the entire industry. The rule is geared toward brokers and advisors, but it will affect products, distribution, servicing and the ETF marketplace.”
And that led to the topic of ETFs and their place—if any—in defined contribution plans. “These platforms were set up with mutual funds in mind, and for the most part haven’t been able to handle the intraday trading of ETFs,” said Jane Heinrichs, associate general counsel at the Investment Company Institute. She added the big question is whether the DOL rule or other market trends will help get more ETFs on to those platforms.
“So far there hasn’t been a big [ETF] push into the space,” Blass said, adding that while some ETF providers have tried to get their products on to these platforms they haven’t met with much success. “The jury is still out whether ETFs can succeed in gaining a serious foothold” in the defined contribution complex.
Kashner questions whether retirement plans and ETFs are a good match, at least at this point. “On a structural level, ETFs don’t lend themselves all that well to the 401(k) business,” she said. “Certainly, intraday tradability isn’t something 401(k) investors have a great need for. And in a tax-sheltered account, the tax efficiency of an ETF doesn’t really bring much to the table.”
What could change the equation, she continued, was the inexorable push toward cheaper products within retirement accounts as part of the DOL rule, whether that be ETFs or other formats.
One of the success stories within the 401(k) space has been target-date funds, those set-it-and-forget-it retirement funds—typically in a mutual fund format—that allocate between stocks and bonds based on an individual’s expected retirement date. Given that these are fund-of-fund structures representing different asset classes, it might seem like a natural fit for ETF products.