This morning's Wall Street Journal includes an Ian Salisbury story on two of The Float's favorite subjects: exchange-traded funds and defined-contribution retirement plans. By our lights, Salisbury doesn't break much new ground, but he does a nice job of describing ETFs' small-but-growing share of the 401(k) market and the trade-offs involved in including ETFs in a plan's investment lineup. Here are a couple highlights:
According to estimates from BlackRock Inc., the largest sponsor of ETFs, investors hold at least $2 billion worth of its iShares ETFs in 401(k) plans after buying about $500 million in fund shares last year.
Since iShares controls about half the ETF market, the figure suggests that in total there may be something like $4 billion of ETF assets in 401(k)s.
That's just a tiny sliver of the more than $1 trillion in 401(k) assets invested in mutual funds, but it represents significant growth from several years ago, when ETFs were almost entirely absent from these plans.
Unlike other 401(k) options, ETFs don't accommodate "revenue-sharing," or using a portion of the fees investors pay to funds to support administrative costs of retirement plans.
Many financial advisers and consumer advocates think that's good news since it makes it easier to keep tabs on what investors are actually paying for.
That last point is especially important. We're no fans of revenue-sharing because of its inherent opacity. But there's another element in a plan's true-and-total cost structure that Salisbury doesn't mention: Bid-ask spreads paid in the trading of ETFs. Of course open-end mutual funds incur spread costs to trade positions in their portfolios as well, but that's exactly the point: The "trading costs" question doesn't resolve so clearly in favor of ETFs after all. When trading is frequent, as it is in the vast majority of 401(k) plans, spread costs add up, even when trades are aggregated within and across plans.
Salisbury mentions the ETF-based plans sponsored by BlackRock's iShares unit. We've looked into those options, and they might make sense for some plans. But we have to be honest: We have other programs at our disposal that impose lower total costs on sponsors and participants and provide easy access to complete portfolios that replicate (almost exactly) the best available ETF-based solutions.
We like ETFs. We use them extensively in our private client practice. We think they may well have a future in the defined-contribution world. But we haven't seen sufficient advantages in ETF-based options to make us abandon our current programs.
Ian Salisbury, "ETFs Make Inroads with 401(k) Investors," Wall Street Journal, January 13, 2010