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ETFs Gaining Traction with 401(k) Service Providers

A new group of 401(k) service providers are offering ETFs as an investment choice


With almost $1 trillion in assets and growing it’s pretty clear the investing public and financial professionals have embraced ETFs. But one place that has been slow to embrace them is 401(k) retirement plans. That’s because the vast majority of today’s 401(k) plans are built upon legacy systems that only accommodate mutual funds.
Despite these obstacles, a new group of 401(k) service providers are offering ETFs as an investment choice. Let’s analyze them.

Collective Trusts
Similar to mutual funds, collective trusts typically pool assets from multiple clients together. Because they fall under banking regulations, collective trusts are not regulated by the Securities and Exchange Commission and they have fewer reporting requirements compared to mutual funds. Banks, trust companies or money managers are the main users of the collective trust structure.

The main benefits of collective trusts are fewer regulatory hurdles, investment flexibility and a competitive fee structure.

“Over a 30-year career, an annual fee of 0.7 percent of assets reduces the purchasing power of a participant’s balance at the time of retirement by more than one-eighth,” noted the Center for Retirement Research in a research report titled “Reducing Costs of 401(k) Plans with ETFs and Commingled Trusts.”

A white paper by SEI Investments from showed the average collective trust fee is 0.26 percent lower versus a corresponding large-cap stock mutual fund.

One company that’s successfully employed ETFs inside collective trusts is ValMark Advisers. The Akron, OH-based investment firm has amassed $850 million inside ten trusts. Each of the trusts only uses ETFs with the exception of small cash positions. In addition, ValMark makes its trusts available on eight different custodial platforms. They’re listed on NSCC with CUSIPs.

Using ETFs has allowed ValMark to offer its 401(k) clients broader choices by reaching important asset classes like commodities, foreign bonds and international real estate.

“We feel that ETFs allow us to get into important asset classes that other funds don’t dare enter, says Michael McClary, ValMark’s Chief Investment Officer. “Our models include exposure to timber and international real estate.” He also says that Sherwin Williams became the first Fortune 500 firm to offer ETFs inside their 401(k) plan when they recently added six of ValMark’s collective trusts to their investment menu.

According to McClary, the total all in costs for ValMark’s trusts range from 0.47% to 0.51%. The fees are all inclusive and they cover the trading costs of the ETFs, the ETF expense ratios, the trustee fee and ValMark’s subadvisory fee. Further information about the company’s trusts is at available at

Drawbacks with collective trusts are that participants can’t roll over collective trust assets into an IRA. They must first convert the account to cash and then roll the proceeds over. Also, participants can’t follow the performance of their assets in the newspaper or on public Websites like they can with mutual fund investments.

Independent ETF(k) Platforms
Trading ETFs inside 401(k) plans has stretched legacy recordkeeping platforms built exclusively for mutual funds to the limit. So instead of trying to fix the problems associated with these one-trick ponies, some companies are by-passing them altogether in favor of more robust solutions.

One such company is Invest n Retire of Portland, OR. The ETF(k) provider has hand crafted its own proprietary record keeping system. It uses ETFs from BlackRock, State Street Global Advisors and Vanguard to build its asset allocation models. It also has patent pending on its system, which allows employees to own whole and fractional shares of ETFs along with self-aligning portfolios.

The company has a training program for financial professionals that helps them to qualify as Erisa (3)38 investment fiduciaries. The 3(38) investment fiduciary has sole legal responsibility for making the investment decisions for the 401(k) plan. According to the company, this alleviates the work of investment management and legal liabilities for 401(k) plan sponsors.

Invest n Retire recently entered into a marketing agreement with Ceredian, a large employee benefits administration specialist to expand its ETF(k) platform.

The company’s CEO, Darwin Abrahamson says Invest n Retire caters to 401(k) plans with $5 million or more in assets. He’s also developed a helpful FAQ that covers all the key questions advisors and their firms should ask before selecting an ETF(k) platform. It’s titled “Questions to ask any firm that claims ETFs can be traded like mutual funds” and it’s available at

Hybrid ETF(k) Platforms
While many new breed retirement platforms just offer ETFs, hybrid platforms accommodate mutual funds, collective trusts and other financial products. “Our platform is built on an open architecture platform that allows for institutional grade asset classes to be made available to the average investor, says Greg Moerchen, CEO of ETF Advisor k. “We are obviously biased towards ETFs since we believe they deliver greater consistency, provide transparency and generally have a lower operating cost when compared to a lot securities offered in retirement plans.”

The ETF Advisor k Program was specifically designed as a fee based program to be used by RIAs with full transparency of fees as its utmost concern. RIA fees are negotiated directly with the plan sponsor, independent from the ETF Advisor k Program.

The Advisor k Program accepts start-up 401(k) plans and it uses ETFs from BlackRock, InvescoPowerShares, State Street Global Advisors and Vanguard. The company provides marketing support to advisors with various tutorials available at

Self-Directed Brokerage Accounts
The ongoing battle for ETF investors between major brokerage firms has been a positive trend for retirement savers. Not only has it introduced a new era of commission free online ETF trading but it’s paved the way for ETFs to play a more central role inside long-term retirement accounts. This is especially true as brokerages expand the universe of ETFs that qualify for commission free trades.

Generally speaking, ETF(k) plans with a brokerage window tend to be used by small businesses with less than fifty employees.

Because of zero commission trades, ETFs can now be used for popular strategies like dollar-cost-averaging without the onerous cost barriers of before. Also, commission free trades make rebalancing an ETF portfolio a viable exercise with no disincentives. Depending upon your brokerage platform it may actually cost more to invest and manage your money in no-load mutual funds than ETFs!

One brokerage firm that’s taken aggressive steps in this developing trend is Sharebuilder. The company’s 401(k) platform aims to provide ETFs in 401(k) plans for small businesses.

While it’s difficult to ascertain the exact amount of ETF(k) assets in self-directed brokerage accounts, some of the recent trends in commission free trading could accelerate their usage.

ETF(k) Plans and their Bright Future
More ETF providers are beginning to make the connection between asset growth and 401(k) plans. Both iShares and WisdomTree Investments have established 401(k) departments and other providers are expanding their ETF lineups to include fund-of-funds and target-date retirement strategies.

Meanwhile, employers are becoming more educated and sensitive to 401(k) plan costs.

The Department of Labor recently put forth new rules requiring clearer disclosure of 401(k) fees and expenses. The new regulations begin in 2012 and will affect roughly 72 million retirement plan participants.

“DC plan sponsors continue to be intensely focused on lowering their plan’s total cost as they correctly perceive that doing so may help them avoid becoming the target of lawsuits and audits,” says Mike Alfred, CEO, BrightScope. His company rates 401(k) plans in 50 states. Alfred adds, “Employing ETFs is one way a plan sponsor can lower a plan’s overall expenses.”

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Article printed from InvestorPlace Media,

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