Low-cost exchange-traded funds
are a favorite of individual investors. ETF assets reached $2.9 trillion in 2017,
up 32 percent in the last year, according to Investment Company Institute, a
So why are so few ETFs offered in
workplace retirement plans?
Of the $5 trillion in assets in
company-sponsored 401(k) plans, two-thirds are held in mutual funds, the ICI
says. ETF assets, meanwhile, are a mere fraction of the pool left over, with
the exact percentage not tracked publicly.
Among retail investors, ETFs are
favored for tax efficiency, intraday trading and cheap fees. There are more
than 2,000 varieties available in the U.S., ranging from plain-vanilla S&P
indexes to niche offerings like an ETF that follows whiskey and spirits company
In a tax-advantaged 401(k) plan,
where investors are in it for the long-haul, those advantages matter less. Many
retirement investors do not understand the differences between ETFs and mutual
Research shows that investors do
better in managed accounts, rather than selecting their own funds, says Steve
Anderson, president of Schwab Retirement Plan Services.
Most managed target-date funds,
which are geared toward a particular retirement date, are mutual funds.
One hurdle has been
technological. ETFs trade throughout the day, while mutual funds do not; mutual
funds are typically priced on a daily basis at 4 p.m. Adding ETFs to a
retirement plan means a change in record-keeping systems.
ETF shares are also sold whole.
But investors usually buy fractional mutual fund shares in a retirement plan,
which are better for handling the random-dollar, bimonthly contributions most
employees make to retirement accounts.
Dan Egan, director of behavioral
finance at the online investment company Betterment, says that one thing that
is stopping other providers from switching from mutual funds to ETFs is how
they are paid - partly by commissions from mutual fund companies.
"It puts them in an awkward
place. If they start offering ETFs, without the revenue, they'd need to start
charging more for the service itself," Egan says.
But it is possible to invest in
ETFs in your 401(k), and some providers have forged ahead in the last five
Vanguard, one of the largest
money managers in the U.S., says it has does not have much demand for ETFs in
retirement plans, but it does have an offering through its Vanguard Retirement
Plan Access, which is for small businesses.
Charles Schwab has been offering
an all-ETF product called Index Advantage since 2012. While it is just a small
portion of the firm's overall 401(k) business that it declined to specify, the
company is bullish on future prospects. The plan design opts-in participants
and offers them a low fee-structure of under 10 basis points. The plan also
offers low-cost advice. That's cheap compared to a traditional mutual-fund
based 401(k) which costs about 50 basis points, according to ICI.
At Betterment, the ETF options
come in the Betterment for Business 401(k), which now has a waitlist for small
companies wishing to add the platform.
For a company deciding among
offerings, one key is to consider your objectives, says Steve Schweitzer,
senior vice president of product and marketing at Ascensus, a provider of 401(k)
If your company does not offer
ETF options and you want them, see if your plan offers a brokerage window
within the 401(k). That would allow the participant to trade whatever they
want, at their own risk.