Why ETFs will soon dominate retirement plans

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is a general structure to the mainstream 401(k) plan; one which has become solidly defined by the limitations of its outdated technology.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 retirementplans (1996).

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. 1 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. 2

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 3 vs. Mutual Fund 4 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. 5

The result has been a growth in assets for ETFs that increasedfrom around $1 billion in 1996, to $1 trillion at year end 2010.

Figure 4: ETF Asset growth in billions of dollars. 6

Finally, this surge in assets in ETFs has been accompaniedby a rise in popularity, as indicated by Google Trends. 7 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. 8

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. 9 However, in retirement plans, ETFs make up less than 1% of assets, a disparitydistanced 10 fold from the mainstream market. 10

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 is coming.

To learn more about the future of retirement plans, read 'The 401k Manifesto - The New Standard:'


Disclaimer : Invest n Retire LLC ('INR') is not engaged in rendering tax accounting legalinvestment adviceor 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.

1 Data provided by Google Trends: http://www.google.com/trends?q=etf%2Cmutual+fund&ctab=0&geo=all&date=all&sort=0

2 2011 Investment Company Fact book, 51 st Edition: http://www.ici.org/pdf/2011_factbook.pdf

3] Plansponsor Magazine 2011 DC Survey: 'Points of Hue:' http://www.plansponsor.com/2011_DC_Survey.aspx

4 ibid 34 Datacollected from the National Stock Exchange Monthly ETF reports: http://www.nsx.com/content/etf-net-flows-list ibid 1

6 Data collected from the National Stock Exchange Monthly ETF reports: http://www.nsx.com/content/etf-net-flows-list

7 ibid 2

8 ibid

9 ibid 2

10 ibid

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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