An excerpt from 'The 401k Manifesto,' which calls for a
revolution in the retirement industry, the core of which is an
entirely new structure designed around exclusively offering
Exchange Traded Funds as investment options. This presents the
only truly viable way to enact the type of technological change
participants urgently need to build higher average retirement
balances on a macro scale.
There is a general structure to the mainstream 401(k) plan; one
which has become solidly defined by the limitations of its outdated
technology. You will know this as the mutual fund dominated,
education laden, manual process driven juggernaut; the variation of
which is only slightly measurable between major service providers;
but it is heading for a major change.
The investment world is shifting. The era of mutual
funddominance is starting to show measurable signs of approaching
dissolution. Inthe beginning of 1984, mutual funds had no assets in
retirement plans. A coupleof years later after the completion of
the record keeping programming necessaryto make mutual funds
available in retirement plans, it took little over adecade for
mutual funds to become the largest segment of assets in
This sharp rise in asset accumulation within retirementplans
paralleled that of conditions for the U.S. market as a whole, which
sawsteady new cash flows into mutual funds for another decade,
until peaking in2007.
What followed, for the overall U.S. market, was an exceptionally
steep declinein mutual fund assets, with assets flowing out of
mutual funds at an everincreasing pace.
Figure 1: Mutual Fundnet new assets in billions ofdollars.
Where was all this money going? The answer is intoETFs, which
despite the volatile market conditions of 2008, continue to
seerecord setting positive cash flows, indicating that the market
was experiencinga committed process of fundamental change.
Figure 2: ETF
vs. Mutual Fund
net new assets in billions of dollars.
There is evidence that the momentum of this fundamentalchange is
building. Since 1996, ETF assets have grown nearly 1000%,
dwarfingmutual fund asset growth by comparison.
Figure 3: ETF vs. Mutual Fund asset growth rate.
The result has been a growth in assets for ETFs that
increasedfrom around $1 billion in 1996, to $1 trillion at year end
Figure 4: ETF Asset growth in billions of dollars.
Finally, this surge in assets in ETFs has been accompaniedby a
rise in popularity, as indicated by Google Trends.
Just as 2008 saw the beginning of massive capital outflows from
mutual funds,it was also the year that the search volume index for
ETFs exceeded that ofmutual funds (Fig. 16 Location A), a shift of
preference that continues to thisday and has been accompanied by a
spike in news reference volume as well (Fig.16 Location B); ETFs
are catching headlines and gaining in popularity.
Figure 5: ETF rise in search volume and news reference volume
comparedto mutual funds.
The result of all this change has been an ETF asset presencethat
is approaching 10% of U.S. investment company total assets at year
end2010, a rise of 26% from year end 2009.
However, in retirement plans, ETFs make up less than 1% of assets,
a disparitydistanced 10 fold from the mainstream market.
What can be seen is that mutual funds are losing assets
andpopularity. The market is heading unquestionably in the
direction of ETFs withever greater momentum and there is no
indication that this will change. As aresult, it is unrealistic to
expect that mutual funds will retain their assetdominance in
retirement plans for much longer; the era of ETF retirement plans
To learn more about the future of retirement plans, read 'The
401k Manifesto - The New Standard:'
: Invest n Retire LLC ('INR') is not engaged in rendering tax
accounting legal investment advice or financial planning services.
INR is not giving advice or offering any opinion with respect to
the suitability of any security or the advisability of buying or
selling any security that may be referenced in this paper. The
information contained in this paper is offered only for general
information and educational purposes. The contents are not provided
as and do not constitute either investment or legal advice. You
should not act or rely on the information contained in this paper
without first seeking the advice of your investment accounting and
legal advisors concerning your own unique situation and any
specific questions you may have.
Data provided by Google Trends:
2011 Investment Company Fact book, 51
Plansponsor Magazine 2011 DC Survey: 'Points of Hue:'
ibid 34 Datacollected from the National Stock Exchange Monthly
ETF reports: http://www.nsx.com/content/etf-net-flows-list ibid
Data collected from the National Stock Exchange Monthly ETF