As ETFs (Exchange Traded Funds) became more popular with individual investors growing steadily led by iShares (now part of BlackRock) and Vanguard, almost a decade ago experts predicted that they would overtake defined contribution plans like 401ks. These experts are still waiting with hopes diminishing fast. Recently, Vanguard, which has $600 billion in ETFs, noted in a P&I article that these funds may not make sense as a standalone option in DC plans.
ETFs seem to be well suited for DC plans as a low cost indexing options without revenue sharing trading throughout the day like an individual stack. Mutual funds, on the other hand, are traded at the end of the day which led in part to the 2003 mutual fund scandals where some parties changed their trades after the market closed. In fact, ETFs have made a great impact on DC plans as building blacks within professionally managed investments like target date or risk based funds and are popular with robo advisors and record keepers.
But even Vanguard, a leading ETF provider, noted that there are better low cost index options like institutionally priced mutual funds, collective trusts (CITs) and separately managed accounts (SMAs) that have no revenue sharing and are generally a cheaper option for DC plans than ETFs. Fidelity Investments, a significant ETF provider, also commented that ETFs might be incur unnecessary trading costs and the tax advantages that individuals get from ETFs are not relevant in retirement plans.
According to a Cerulli survey, only 4% of ETF providers are targeting DC plans focusing instead on endowments, foundations and institutional asset managers.
Experts suggest that DC participants that use ETFs on their own and want to use them in their retirement plan should access them through brokerage windows. For the rest of us, and the vast majority of investors that delegate portfolio management to professionals, ETFs will continue to be a key ingredient just not as a stand-alone meal.
