Redefining 401(k) Plans: The Rise of ETFs
ETFs in 401(k)s?
Welcome to this week's news brief.
Defined-contribution plan menus, perhaps the last place mutual funds maintain a real toehold , are changing.
First, collective investment trust products started gnawing away at mutual funds' market share.
Early on, only the biggest 401(k) plans could get access to these bank products. But technology—and demand— have brought CITs down market.
Today, within the $7 trillion DC plan market, assets within the products are approaching parity with mutual funds, according to Northern Trust.
And now, State Street Global Advisors' Chief Business Officer, Anna Paglia, says her firm is "working hard " to get exchange-traded funds on plan menus.
Historically, legacy recordkeeping platforms' inability to account for the funds' intraday pricing and fractional shares kept ETFs out of DC plans. A Portland, Oregon outfit called Invest n Retire cracked the code and in 2011 patented its process. But ETF-focused plans never took off. Betterment, Charles Schwab, ShareBuilder and Vestwell have all introduced options since, although uptake remains relatively low.
"There are so many reasons not to do it," Dick Darian, founding partner of Wise Rhino Group, which consults on M&A in the retirement space, told Ignites last year. The ETF structure, beloved by some for its tradability and tax efficiency, loses its allure in a long-term, tax-deferred account, some have argued.
Meanwhile, managed accounts within 401(k)s appear to be having a moment .
A survey of 823 active 401(k) participants conducted by Cerulli Associates and Edelman Financial Engines — one of the largest provider of such products — show that half of those enrolled in managed accounts felt confident about retirement compared with just 16% of "non-advice" users.
Plan sponsors, on the other hand, may be skittish. Last week, Bechtel Global Systems got smacked with a suit alleging excessive fees within its $5.1 billion plan. The default managed-account option cost participants more than 10 times what they would otherwise pay, according to the claim.
Barry Salkin, an attorney at the Wagner Law Group, who isn't involved in the case, told Ignites. "The question is: Are plan participants getting more value from the managed account option?"
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