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ETFs Shunned By Many 401(k) Plans

August 4, 2010 • Page 2 of 3

Those aren't the only roadblocks ETFs face. Large corporate plans have access to the lowest-cost mutual funds, negating a large part of ETFs' price advantage. They also have access to collective trusts--very-low-cost institutional accounts managed by banks.

At smaller companies, the obstacle is operating costs. Traditional mutual funds offer an easy way to pass costs along to participants: Many funds have special classes of shares for retirement plans that have extra fees built in to compensate advisors and service providers, as well as paying for record keeping and administration.

Such fees, including 12b-1 fees earmarked for marketing and distribution, can run to 0.5% or more of assets per year. ETFs generally don't have 12b-1 fees, so they don't offer that kind of bundling.

What's more, it's much tougher for third-party administrators of retirement plans to tackle trading and acquisition of ETF shares on behalf of the plan participants, as well as managing the record keeping for fractional-share ownership.

Still, a number of companies see opportunities to offer ETF-based 401(k) plans.

Darek Wojnar, managing director of product strategy for BlackRock Inc.'s iShares unit, the biggest issuer of ETFs, is working with third-party administrators to overcome the largest technical barriers to holding ETFs in the plans. So far, 60 administrators--in an industry of about 1,600 overall, according to Judy Diamond Associates--are set up to handle ETF transactions.

As for investor assets, iShares had $2.7 billion of its overall $352 billion in ETFs housed in 401(k) plans at the end of June.

In March, Folio Investments launched Folio(k), a series of 401(k) offerings structured around ETFs. In the program--as with similar programs from other providers--participants can mix and match ETFs as they wish, or choose among portfolios of index ETFs in specific risk- or age-based allocations.

Several other firms, including ING Direct and Ascensus, are catering to plans looking to incorporate ETFs.

Some smaller players are getting in on the game, too. Brenda Wille-Cope, a managing partner at First Financial Strategies in Denver, moved her company's own plan to risk-based ETF model portfolios constructed by 3D Asset Management of East Hartford, Conn.

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fundinvestguru 13 years ago

Half of All Money Invested in Retirement Savings A

At the end of 1999, there was %11.1 trillion in America's Retirement Savings (IRAs, 401(k)s, 403bs, variable annuities, etc.).As of the end of 2009, a decade later, the total was $14.4 trillion.If each year's annual increases are added up and you can assume that each down year's declines didn't happen -- if they had only invested in a non-interest bearing account like a checking account, by the end of 2009, the total would have been $28.4 trillion!That means that over $14.0 trillion or half of the total invested cummulatively in 401(k)s has been lost to investments in company stock, passive index funds, target maturity funds and "actively-managed" buy-market-only mutual funds.That also means that our overburdened US Treasury chose to forego the opportunity to collect $4 trillion in income taxes. That's enough to pay for both wars, the stimulus and bailout programs, much of the Health care cost, and to give US taxpayers a one-year federal income tax amnesty.The US Treasury can build its coffers by spending less and taxing more but in this case the bigger payoff would have been collecting its biggest receivables as well.By the way, of that $14.4 trillion in savings includes another $4 trillion in income taxes that they will owe when they withdraw.Maybe we need to consider tax-deferral and 401(k) savings?
fundinvestguru 13 years ago

Facilitating ETFs in 401(k)s

EFTs have much to offer 401(k) Investors: Lower Expense Ratios and Opportunities For Adding Potential Extra Return (Alpha) To Your Employees' PortfoliosAccording The Latest MorningstarÂ® PrincipiaÂ® Mutual Funds Data BaseETFs have expense ratios that average 50 basis points (BPs) less than traditional mutual funds.In part, because of the fact that ETFs offer roughly 700 sector investment choices, or ten times the style-box sector choices offered by traditional mutual funds, on average they have the potential to contribute about 150 BPs. (The wide choices in the hands of experienced sector rotation asset managers can add needed value.200 BPs potential extra return from portfolios of ETFs is more than many independent investment advisors charge for managing a separate account of ETFs and/or mutual funds. Their track record is public information (with the exception of Morningstar advisors $92 billion of managed separate accounts of funds and ETFs which Morningstar has opted to not disclose in MorningstarÂ® PrincipiaÂ® Separate Accounts data base).Offering ETFs In 401(k)s Have Three Obstacles To OvercomeMost 401(k) custodians do not offer ETFs in fractional shares and trade ETFs only in full shares with small and differing amounts being contributed or withdrawn from a 401(k) account. The combination of low expense ratios and the SEC's intention to restrict 12b1 plans to 25 BPs may restrict financial incentives to distribute ETFs.Offering a large range of investment choices may be confusing to employees when access to independent third-party investment advisors is discouraged.Facing The Hard Facts On 401(k)s: Half of every dollar invested in 401(k)s has been lost to imprudent investments (excessive investments in company stock, buy-and-hold stock mutual funds, and target maturity funds).The "miracle of compounding" only works with consistent positive returns; when you lose money, the compounding works against you. Investors in 401(k)s have given up the tax-preferred long-term capital gains treatment of exclusion of current income taxes that many expect to be "lower in retirement," a premise that is becoming increasingly doubtful. ERISA regulators have been not encouraged RIAs to educate or manage 401(k) accounts. The Department of Labor's latest intentions to exclude past performance from any acceptable investment strategies is clearly of dubious wisdom and a gross misunderstanding of the intentions of the SEC's warning that "past returns are not indicative of future performance."An Ideal Solution should include (1) low-cost ETFs and funds, (2) independent investment advisory education and/or management, and (3) a platform for professionals to manage separate account portfolios.FolioFN.com, an independent discount broker offers convenient trading in fractional shares of ETFsMorningstarÂ® PrincipiaÂ® Separate Accounts lists managers who manage proactively-managed portfolios of ETFs and funds (but not the $92 billion managed by Morningstar itself).Employees may be better served by professionally-managed portfolios of ETFs than be investing directly in ETFs themselves. This permits low-cost regular portfolio review.The Advantages and Disadvantages of Managed Separate Accounts:Many independent advisors' separate accounts are simply cheaper versions of unsuccessful passive asset allocation strategiesFew advisors have credible long-term track records of successful proactive managed account performance. Keep in mind RIA reporting standards are as onerous and mutual funds'.A wise benchmark might be to seek an account with a high-return low-risk and five-star long-term performance.The central considerations for selecting a 401(k) platform should be:The reasonable expectation of consistent future positive returns (Caution: Conservative bond fund profits and positive returns may soon be behind us.)The probability that the investment will achieve its implied investment objectives (growth funds that grow, value funds that add value and income funds that create positive total returns).That the investors' choices are both "suitable" for retirement savers and "in the best interests of the investor" to satisfy the most demanding fiduciary standards being studied by the SEC. Both The asset gatherers' and asset managers' financial incentives can also be satisfied.Full disclosure is a laudatory regulatory objective, however, the more complex and technical the disclosure, the less likely that the disclosure will or can be read and understood by non-lawyers.Until 401(k)s can address their employees' investment objectives in a more realistic manner, investors are better off by investing elsewhere.