When Will ETFs Break Into 401(k) Business?

When will ETFsbreak into the 401(k) business? It's been a hot topic for years but there's been little progress. The problem: 1) handling fractional share purchases and 2) resistance from institutions and advisors who would make less money using ETFs.


How much less money?

Darwin Abrahamson and Neil Plein of Invest in Retire says the average 401(k) charges about 150 basis points.

Abrahamson did a presentation at the IndexUniverse Inside ETF conference where he said he could do ETF model portfolios at an average cost of 70 basis points.

Seventy basis points vs. 150 basis points. That is quite a difference.

Where does that 150 basis points go? About 25 goes to the record keeper (Fidelity, Vanguard, etc., who keep track of the information), another 25 to the broker as a 12b1 fee, and the balance goes as management fees or other expenses that go to the company offering the fund.

Get it? A lot of people get paid.

Under Abrahamson's system, 20 basis points would go to the ETF company — Vanguard, BlackRock, etc. Another 15 basis points would go to the investment manager, 25 to the record keeper, and 10 for the custodian and any third party administrators.

Abrahamson's firm is the record keeper and provide the trading platform.

The firm has just received a patent on a system for managing ETFs in retirement plans--which also addresses the problem of fractional shares.

They have already signed up their first clients. There's competition — Schwab told me they were also working on an ETF platform for 401(k) programs.

Abrahamson thinks that's good news — that Schwab, Scottrade and others may license their technology.

"We'd be very interested in working out a relationship," he said.

Bottom line: there's finally an attempt to unbundle the fee structure of 401k plans.

That, as Dave Nadig of IndexUniverse has remarked, is a very ETF-like thing to do.

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