Schwab plans to add ETFs to its IndexAdvantage 401k product in the near future.
In an early November Wall Street Journal interview with Steven Anderson, executive vice president of Schwab Retirement Plan Services, Anderson indicated that Schwab’s product would allow for fractional shares, the main reason why it has taken so long to bring to market.
That is a definite game-changer. And in addition, it plans to reduce the average plan’s operating expenses from 0.16% for index mutual funds to as low as 0.10% using ETFs. Anderson points out that more than 100 ETFs will be available, including ETFs from other providers.
ShareBuilder 401k offers ETFs within its 401k plans and has since 2006. Although you’re restricted to 21 specific funds from iShares, State Street, Vanguard and others, the offerings are pretty much everything a typical 401k plan would offer. The big knock against ETFs back when ShareBuilder was getting this operational was that record-keeping would be too expensive, forcing plan administrators to pass that cost onto the sponsors defeating the purpose. Today’s technology should eliminate this concern.
The major problem I’ve always had with mutual funds is transparency. If you bought an actively managed mutual fund like the Vanguard Windsor Fund Investor Shares (VWNDX) at the end of November, you had no way of knowing what the holdings were on the day you acquired your shares. The latest holdings report available was September 30, a full two months before you bought your shares. With end-of-year window dressing getting underway, you probably wouldn’t recognize some of the names in the year-end report for the fund.
With ETFs you get a real-time, daily view of your holdings, and you know how much volume is trading on your funds and the money flowing into them. These are three critically important pieces of information that mutual funds just aren’t able to provide in real time.
U.S.-listed ETFs totaled $1.1 trillion at the end of 2011. Two years later, they’re expected to hit $1.7 trillion. Some of that growth is due to two straight years of booming equity markets, but the underlying popularity for owning ETFs has kept the ball rolling nicely. Individual investors are always slow to catch on to trends; institutional investors have been using them for many years.
Once the average Joe with a 401k figures out that ETFs have a lot going for them compared to mutual funds, the rush of money will be significant.
Plan sponsors, listen up — it’s time for 401ks to finally buckle to ETFs. You have a moral, if not fiduciary duty, to do so.
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As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.