Though Charles Schwab still seems committed to putting them into DC plans, are ETFs — as one advisor stated in a P&I article — a square peg in a round hole? Schwab’s all-index 401(k) product was launched with much fanfare in 2012; their all-ETF product was introduced earlier this year. Schwab claims that 10% of their 955 DC clients with $96 billion in assets are either moving to or interested in their passive platforms. But a Towers Watson consultant who seemed to be less positive about ETFs in DC plans told P&I that the benefits of an ETF — intraday liquidity and tax efficiencies — have little value within DC plans.
For the most part, the technical issues of putting ETFs into DC plans have been overcome, with Schwab claiming to have perfected the process. Firms like TD Ameritrade, Matrix and Ascensus are now offering them. But some believe that the cost savings are lost on larger plans, which have very economical passive investment choices. In fact, the three largest ETF providers — BlackRock, Vanguard and State Street — dominate the large DC index market, with $900 billion. On the other hand, Schwab, a much smaller ETF provider (less than $20 billion), has only $7.5 billion in large-market DC passive strategies.
Should most advisors be thinking about ETFs in DC plans? Advisors have a "complexity budget" with their clients and should be careful about where the effort is spent. Are ETFs worth the cost? What do you think?
