Exchange-traded funds crop up from time to time as being a product whose time has (nearly) come – but among NAPA Net readers?
The Investment Company Institute (ICI) reports assets of all exchange-traded funds rose in May by $59.77 billion (2.1%) to $2.90 trillion, and that over the past 12 months, ETF assets increased $693.90 billion, or 31.5%. Of course, ETFs offer intra-day trading, no early redemption fees or minimum holding periods, and many have a passive investment focus – all of which have led a number of providers to offer ETF-centric platforms that purport to have significantly lower fees compared with the typical mutual fund laden 401(k).
Well, ETFs may be making big inroads in the retail space, but among NAPA Net readers – not so much. More than half (56%) said they weren’t using ETFs in any of the programs they worked with, and another quarter said “not really.” The remaining roughly 19% either said that some of their plans used ETFs (17%) or most of them did (2%).
Nor is that current state of affairs much changed over the past five years; nearly two-thirds (64.5%) said that ETF usage hadn’t changed during that period, though about 4% said it had actually decreased. However, about 30% said it had increased, with the rest acknowledging that while it had increased for retail/wealth management clients, there had been no uptake on the retirement plan front. “There is discussion but no practical application with recordkeepers today,” noted one reader. “We have increased use of collective trusts.”
Plan Sponsor Focus?
As for plan sponsor inquiries, the results were more diverse: 35% said plan sponsor clients hadn’t asked about ETFs and another 8% said that while plan sponsors hadn’t inquired, they had broached the subject from time to time. But 37.5% said that some plan sponsors had brought up the topic, 14% indicated that the subject has come up occasionally, and 2% said there had been some interest. Two percent noted that not only had there been interest, but that it seemed to be growing.
Asked if they had come across ETFs in plans on which they had bid, readers responded:
29% - none
25% - some
23% - can’t really recall
21% - a few
2% - a growing number
Why have ETFs been so slow to catch on with retirement plans? Here’s what our respondents said:
51% - intraday trading doesn’t fit with the rest of the platform
32% - intraday trading not needed
2% - lack of revenue sharing
The rest were a combination of multiple responses, and a general comment that recordkeeping platforms weren’t able to accommodate the option. “Both lack of rev share and end of day trading is very volatile which is when the recordkeeper places trades,” noted one reader. “Most providers cannot accommodate intraday trading, so it is just another mutual fund with no fractional shares and low weekly contributions don’t make for a good fit,” observed another. “Provider availability and intra-day trading is not as important when investing for retirement,” commented another reader. “All of the above,” commented another reader, who went on to note that “…the ETF cost advantage virtually disappears when compared to low-cost index mutual funds.” And then, “In most cases, recordkeeping systems are not built to handle,” said another.
Other Comments
We got another good set of reader responses this week – here’s a sampling:
“We have not adopted using ETFs. We use institutionally priced funds with zero revenue sharing.”
“I see ETFs as a good fit for pension plans, but 401(k)s will continue to be slow adopters due to: (1) institutional mutual funds’ expense ratios have very much come down; (2) SDBAs are a way for participants to use ETFs if desired; (3) if rev share is needed index funds are available in share classes to accommodate; and (4) hot money in ETFs causes intra-day and especially end of day price considerations.”
“A lot of the benefits of ETFs are muted by the structure of 401(k) plans. Mutual fund indexes are nearly as low cost as ETFs. Many plan sponsors don’t want active trading in the account so the intra-day trading is a negative.”
“There are other options at low cost, without revenue sharing available.”
“We monitor several ETF strategies and have yet to see their performance drastically out perform a basic mutual fund. Intra-day trading is not a huge need in 401k plans. The average participant needs to save more, not reduce their fees by 0.10%. Our industry continues to look around the problem instead of directly at it.”
“We don't need more complications.”
“I am not a fan of them in retirement plans for the same reason I am not a fan of the brokerage windows in 401(k) plans. It opens the plan and its participants up to more exposure and liability.”
“The recordkeeper has to be able to trade frequently and we don’t believe they are trading real time. Passive investments at a very low cost are available and is retirement savings about having the ability to day trade or establishing an appropriate asset allocation and contributing enough to get them to the finish line?”
“Most DC money today is going into target-date funds. When target-date funds are built with institutionally priced mutual fund shares or collective trusts, they can produce as low or lower fees than ETFs. The other advantages of ETFs (intra-day trading and tax efficiency) are irrelevant in the DC world. Individual participants who want ETFs can do it through a self-directed brokerage account.”
“As a firm, we don’t think they are appropriate in a retirement plan.”
“The common investor wants ETFs because they are told they have low fees in articles they read. They don't know or understand intraday trading. After an educational discussion, they realize index funds can fit their needs just as easily – assuming cost is their only concern.”
“Some providers were using a cash side fund to handle the change in market value from the time the employee enacts the trade and the trade is pushed out to the custodian. I had concerns about this structure and diluting the ETF balance. Sponsors do not necessarily want their employees having the access to trade throughout the day. Mutual funds are more traditional for many sponsors.”
“On an open-architecture platform, ETFs are valued at one price at end of day, so it is just the same as an indexed mutual fund. If you are offering low cost institutional mutual funds, then providing the index is usually actually cheaper than paying the trading costs of the ETFs. However, because of the market appeal of ETFs, some advisors still use ETFs despite this issue.”
“Simply stated, ETFs do not improve retirement outcomes for 401k plan participants, but they do add complications. There are numerous studies indicating retirement success is not primarily due to better investments – you can't invest your way out of no or low savings rates. And the expenses of index mutual funds and collective trust funds have come down substantially to void any material cost advantage of ETFs. With no definitive benefit of using ETFs over other investments in 401k plans, why add another level of complication for participants? Most participants are already overloaded with more decisions than they can handle.”
“ETFs have a higher trading than mutual funds. These additional costs often mitigate any savings, especially considering the lowering of mutual fund expenses in recent years.”
“Too few participants (and sponsors!) understand ETFs and how they should work inside a plan, and for advisors the issue is benchmarking... they are not all created equal.”
Thanks to everyone who responded to this week’s NAPA Net reader poll!
