The 401(k) market is seen as the final frontier for the
exchange traded fund (
) industry to traverse. But there are already pioneers out there
staking a claim on this new front. One of them is ING Direct's
We caught up with ShareBuilder 401(k)'s General Manager and
Principal Stuart Robertson, who discussed the benefits of having
ETFs in 401(k) plans, why it's been so slow to catch on and
ShareBuilder 401(k)'s own role in the space.
When your company pioneered an all-ETF 401(k) plan in
late 2005, ETFs weren't recognized as a fit for retirement plans.
What did you see back then that other providers didn't?
We saw a marketplace typically serviced by more complex and
higher-expense funds. This can be very confusing and costly to
employers and employees, especially for small businesses. With
exchange traded funds (ETFs), we saw the opportunity to build what
we believe is a better 401(k) plan for America. ETFs offer lower
expenses, a broad array of choices across asset categories and fee
transparency. Both mutual funds and ETFs offer solid
diversification options for 401(k) plans, but ETFs are often a much
lower-expense solution and this can make a big difference in
building savings for retirement. [
Special Report: 401(k) Plans, ETFs and You.
What are the differences between a traditional 401(k)
made up of mutual funds and one that's composed only of ETFs?
The majority of 401(k) plans are very different from ETF-based
401(k) plans. ETF-based 401(k) plans are almost universally taking
an index-based approach to investing whereas traditional 401(k)s
take a more actively-managed approach.
Another related reason is cost.
Traditional 401(k) plans tend to offer actively managed mutual
funds with just a few lower-expense index mutual funds. Actively
managed funds typically incur greater costs in research and trading
than an index fund. For each extra dollar spent, the fund must
overcome these expenses to outperform its benchmark index
(typically the success measure of the fund). [
Slowly But Surely, ETFs Ease Into 401(k) Plans.
These higher expenses would be fine if evidence supported that
actively-managed funds were consistently outperforming the indexes.
But overall, they're not. While no one can predict the future,
history has sided with index funds. Across major asset categories,
the benchmark indexes have historically beaten 60% to 75% of
actively managed mutual funds over a five-year period of time,
according to the Standard & Poor's Indices versus Active Funds
There are other technical differences on how shares are offered,
bought and sold, but it still comes down to core cost differences.
Over time, high-cost funds can be a big drag on how much a person
can save for retirement. That's why ETFs are a great fit for
Are ETFs in 401(k) plans offered different than those
traded at retail?
The ETFs you can find at any online or brick-and-mortar broker
are exactly the same as the ones you'll find in ETF-based 401(k)
plans. However, ETFs in 401(k) plans are often offered differently
in two ways:
- No transaction fees. Transaction fees are common in retail,
but are not typical in 401(k) plans. ETFs offer investors the
opportunity to be traded throughout the day like a stock and most
brokers charge to cover the cost of these trading transactions.
However, most ETF-based 401(k) plans tend to limit you to one
trade per day, per ETF much like mutual funds are in general.
401(k) plans service long-term investing strategies versus what
is required to service retail investors and day traders. [
What's Holding ETFs Back from the 401(k)
- A preset line-up of fund options. In the retail space, you
can choose between hundreds upon hundreds of ETFs. Not so with
most 401(k) plans. Employers take on a responsibility to offer
funds that are aligned with an investment policy, and research
shows the more options available leads to fewer people that
participate in the 401(k) plan. Both drive the need for a focused
line-up of funds in 401(k) plans.
There is a lot of discussion around fee transparency in
401(k) plans. How do ETFs help?
For one thing, ETFs help participants to more clearly understand
what they're paying for. With mutual funds in retirement plans, you
often run into "alphabet soup." That is, there are often many
different fund classes such as A, B, C, R, and I shares for the
same fund. There is little to no difference in the stocks and bonds
that make up the specific fund and its share classes.
What is different is the cost. One class of the fund may carry a
load (front or back) or simply carry a higher expense ratio than
another share class. These costs pay primarily for distribution
(the person who sold you the plan) and marketing. The
lower-expense, no load fund will be a better value for an employer
and his or her employees. [
401(k)s: The Last ETF Industry Hurdle.
Unlike mutual funds, ETFs have no variety of share classes so
there's no confusion in what you're paying for.
I see that when you launched ShareBuilder 401k, you
entered the market with plans designed to service small
businesses. Are ETF-based 401(k)s especially suited for smaller
companies? If so, why?
ETFs are a great solution for 401(k) plans. Two things stand out
in particular that make ETFs well-suited to serve small businesses
from both a customer and business perspective:
- Low-expenses. While large companies with big 401(k) plans may
qualify for the best mutual fund share classes that are more
competitive with ETF expense ratios, most small businesses don't
and won't - ever. ETFs enable a small business to have a plan
with fund expenses right in line with the big firms. [
ETFs vs. Mutual Funds.
- No investment bias. While 401(k) plans are very common in
large companies, that's not the case for small business. From our
research, we've found that roughly 20% of businesses with fewer
than 50 employees have a retirement plan. That's about one-third
of the U.S. work force without access to a retirement plan. In
selling to a large company, the decision-makers are often
comfortable with their fund lineup. But, if you've never had a
401(k) plan before or feel your plan has higher expenses than
you'd like, it's easier to have discussion on the best fit for
your retirement plan. [
401(k) Plans That Use ETFs.
Why aren't more providers offering ETFs as an option in
their 401(k) plans today?
ETFs are a big change for an industry that's been built around
mutual funds for the simple reason that ETFs didn't exist when
401(k)s came into being. Some providers are concerned about, and
have yet to understand, how to manage record keeping for ETFs.
Others are concerned about how ETFs may affect revenue. Yet
providers are seeing the inroads ETFs have made and will need to
work this out. [
IRA Assets Growing.
How can companies and employees get ETFs into their
You can start by asking for them to be added to your current
plan or by seeking out providers that offer them. I've often
referred to this as the "I want my MTV" phenomenon. In the 1980s,
customers had to ask their cable carriers to offer MTV and, after a
few years, MTV became a cornerstone of cable TV. The good thing is
that a business isn't held hostage to a few providers unlike the
cable industry. Even with that difference, we expect it will take
another five or so years, until ETFs are a common offering from
most providers. We need to keep educating employers and employees
about their benefits, and businesses need to keep asking their
providers for ETF-based plans. As this continues to happen more
providers will support it. [
ETFs and the Retirement Problem.
Stuart Robertson is general manager and principal of
ShareBuilder Advisors, LLC which operates
. ShareBuilder Advisors, LLC is a subsidiary of ING Bank,