This week, RIABiz posted an article highlighting two trends in the 401(k) ETF-only space. According to the article, Schwab has signed the first firms onto its ETF-only 401(k) platform. One RIA, however, is switching to TD Ameritrade.
That RIA, Miracle Mile, essentially chose to go with TD Ameritrade because of Schwab’s decision to keep RIAs and 401(k) businesses in “separate silos,” RIABiz reports. The article goes on to say that Schwab’s decision may not be without costs as the “Department of Labor regulations continue to favor RIAs more and more. Bottom line: RIAs are wired for fiduciary care and brokers and brokerage firms — not so much.”
It will be interesting to watch how all this plays out. Is Schwab better off going after the market directly and thus bypassing independent advisors? From Schwab’s perspective there are certainly pros and cons of both approaches. As it relates to TD Ameritrade, who has never sold 401(k) services direct, it is a bit of a no-brainer to align with RIAs in the DC space.
The article also quotes Mike Alfred, co-founder of BrightScope, as saying, “You don’t see major trends start in $2 million plans.” I would take issue with that statement in this regard: That is exactly where we are likely to see the first and perhaps most rapid adoption of ETFs — especially in small professional groups in which many of the primary decision makers are already high net worth individuals currently using ETFs as promoted by their personal advisors. Small plans are also inclined to have company principals making the 401(k) investment decisions versus company agents. The latter are much more risk adverse than the former when it comes to change. To quote an often-repeated observation, agents “feel as if they cannot get fired for hiring IBM.” Many principals became principals by taking (calculated) risks.
The small market (or “emerging market” as it is sometimes called) also represents the best place where the adoption of ETFs can move the needle on fees. For one thing, the upper end of the market has already been through significant 401(k) fee compression. Furthermore, larger plans have greater buying power and can access investments at a lower cost than smaller plans can. Outside of being included as a part of an underlying asset allocation fund, large plans may never (in great numbers) see the need to adopt pure-ETF strategies in their 401(k) plans.
Conclusion
Given that there are more than 600,000 small 401(k) plans that present plan advisors with many bite-sized opportunities to gather assets, along with an opportunity to rub elbows with well-heeled professionals, it should not come as a surprise if the 401(k) ETF-only market takes off over the next few years — that is, in the small to mid markets.
