Behind the Money

ETFs Prepping 401(k) Offensive — For Better or Worse


Coming soon to your 401(k) plan: trading vehicles that will allow you to buy and sell baskets ofstocks, commodities and even more obscure financial instruments in the blink of an eye.

Providers of exchange-traded funds (explain this) are readying a major lobbying effort to push aside mutual fund firms and make inroads into the more than $5 trillion currently held in retirement savings accounts.

“Over the next 12-24 months, most of our industry sources highlighted ‘distribution’ as a key theme,” said Nicholas Colas, chief market strategist at ConvergEx Group. “Retirement assets in self-directed programs (as 401(k) and others are known) are the last great bastions of the mutual fund world, since most firms that provide bookeeping for these plans built their systems around these invest products.”

The strategist’s survey was of executives at ETF companies which represent more than half of the $1.2 trillion in the fast-growing industry.


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Plan providers, such as Fidelity, Charles Schwab and Vanguard, are hesitant to offer a plethora of ETFs to investors on fears most of these products are too sophisticated — and perhaps, too risky — for the typical owner of a retirement savings plan. Only about 1 percent of assets in these plans are in ETFs, estimates Colas.

“There’s nothing stopping the ETF juggernaut from encroaching into the world of 401(k)s,” said Mitchell Goldberg, a financial advisor and president of ClientFirst Strategy. “It is a good thing. More choice and lower fees are what regulators are pushing and ETF usage satisfies these demands.”

One thing holding up the ETF takeover may be that these plan providers are figuring out how to get their piece of the commission pie first. For example, Charles Schwab is developing a 401(K) product for this year that will focus solely on ETFs.

Regardless, these firms (and possibly regulators as well) will need to figure out which ETFs are safe enough to invade the accounts that have effectively replaced pension plans as the core way corporate America enables employees to save for their golden years.

“This is a terrible idea,” said Robert Savage, chief executive of research site “The leveraged, 2-times stuff should be banned and never allowed in 401Ks. The other ones have issues – particularly those related to commodities and futures rolls.”

However, Colas expects the ETF industry to counter that criticism in their lobbying efforts by emphasizing low-volatility funds like those that focus on dividend stocks. His survey of ETF executives also suggests that they may develop so-called target date versions of ETFs. These funds, which attempt to allocate assets based on an individual’s estimated retirement date, have become all the rage in the mutual fund world.

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