We’ve been hearing why ETFs make sense in 401(k) plans for a long time. But especially in light of the DOL’s fee disclosure regulations — which highlight cost and transparency, two of ETFs’ advantages over traditional mutual funds – perhaps their time has truly come. Providers large and small, powerful and not so powerful, have tried to use ETFs to storm the 401(k) gates guarded by mutual fund companies. If so much smart individual investor money is leaving mutual funds (especially actively managed ones) and flowing into ETFs, then surely participants in 401(k) plans will follow, right?
Not so fast. Some argue that index funds give investors low-cost options without the trading issues inherent in ETFs, which force record keepers to implement changes they are loath to make. By their nature, ETFs lack revenue sharing, leaving record keepers out in the cold and putting more of a cost burden on participants who don’t choose ETFs.
Beyond that, with so much emphasis on packaged investment products like TDFs, do stand-alone investment options like ETFs make sense for most participants? Even the big dogs are not focused on naked ETF options. BlackRock, which owns the dominant ETF manufacturer iShares, is touting their TDF, which includes ETFs as building blocks; Charles Schwab, which is pushing their all-ETF platform, is emphasizing advice using low cost options like ETFs. So is the article on NASDAQ’s website claiming that ETFs’ time is coming prescient, or just another case of wishful thinking by an ETF provider without alternative means to tap the 401(k) market the way BlackRock and Schwab did?
