(Dow Jones) The investing world's current darlings, exchange-traded funds, get no love from 401(k) plans.
Investment advisors like ETFs for a bunch of reasons: They carry lower fees than most mutual funds, offer tax advantages and can trade like stocks. What's more, an ETF price war broke out among big financial firms this spring--driving expenses and commissions even lower.
So why aren't advisors, many of whom consult to corporate retirement plans, pushing to include ETFs in 401(k) portfolios? By the most generous estimates, only 5% of the $830 billion invested in ETFs is held within 401(k) plans.
Many advisors say the problem is simple: ETFs just aren't a good match for 401(k)s. The big advantages that the funds offer get lost inside 401(k)s, these advisors say, and ETFs can bring technical headaches for the companies that manage the plans, so many don't want to offer them.
Ary Rosenbaum, a retirement-plan lawyer in Garden City, N.Y., is among the skeptics. While he uses ETFs for his own investments, Rosenbaum says he can't get the numbers for ETFs in 401(k) plans to add up. "Index mutual funds are already low cost," he says, one reason they are popular in 401(k)s.
While ETFs can have similar or lower expenses--sometimes under 0.2% or even 0.1% of assets a year--investors generally must pay brokerage commissions to buy or sell them, unlike most funds in a corporate plan. (The total cost of a 401(k) plan can run above 1.5% of assets.)
Further, in a 401(k), investors typically won't be able to take advantage of one of the key appeals of ETFs--the fact that they trade all day long rather than just once a day, as is the case for mutual-fund shares.
Likewise, Roger Wohlner, a Chicago-based financial planner, likes ETFs but hasn't seen a reason to include them in the nine retirement plans he advises. While he generally recommends one or more index mutual funds to his clients, the ETF inclusion "feels like a solution looking for a problem," he says.
Vanguard Group, which manages two of the 10 largest ETFs in the U.S., is of similar mind. In a September research note, the Vanguard Center for Retirement Research said that, while index ETFs may be a substitution for "high-cost actively managed funds," in 401(k) plans, the true advantages of an ETF--intraday trading and tax efficiency--are less relevant to a tax-sheltered retirement account.
ETFs add more complications. An ETF that tracks an index can see its price vary from the value of the underlying securities if the index is thinly followed or if there's low demand for the ETF itself. Recent events have also set the ETF faithful back a few steps. More than two-thirds of the securities that saw aberrant trading during the May 6 "flash crash" were ETFs, for reasons that remain unclear.