In a welcome development, “ETFs Slowly Displace Mutual Funds in 401(k)s:”
BlackRock(BLK), the largest seller of exchange traded funds, is helping to push more Americans toward ETFs instead of mutual funds in their 401(k) plans.
Americans held $3.9 trillion in employer-based defined-contribution retirement plans, of which $2.7 trillion was held in 401(k) plans as of Sept. 30, according to the Profit Sharing/401k Council of America. Mutual funds had $2 trillion of those assets, but ETFs are starting to chip away, as they have with everyday trading among institutional and individual investors.
BlackRock estimates that as much as $2 billion of its iShares funds are now held in 401(k) plans, accounting for half that market. “Within the 401(k) space in the next five years, it is conceivable that flows to ETFs could reach several billion dollars,” says Darek Wojnar, head of product research and strategy at BlackRock’s iShares, its ETF unit.
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The main selling points are low and transparent fees. According to BlackRock, the average expense ratio of an iShares ETF is 0.41% versus the average mutual fund’s 1.50%, a difference that can result in tens of thousands of dollars over 30 to 40 years.
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In 2007, WisdomTree Investments(WSDT) created a business unit designed to deliver ETFs to the 401(k) marketplace. In all, the company sells 52 funds.
Small businesses have been early adopters of ETFs in their retirement plans because of lower costs. That trend may continue until larger companies join the fray. When that happens, mutual funds’ dominance may slip quickly.
Sure, while low and transparent fees are an attraction, more important for any investor is the removal of trading restrictions. This will make it easier to implement a strategy, such as trend tracking, along with the use of sell stop points.
The current rigid model that blacklists investors not only for frequent but also infrequent trading is clearly designed to benefit the provider and not the individual. If mutual funds do not ease up on one-sided rigid policies, they will be the losers in the long run, because the development of ETFs simply can’t be stopped.
Comments 1
Ulli,
Great article today, yes the ETF market is certainly putting the hurt on the mutual fund market. The mutual fund companies hurt themselves by several companies closing some of their best performing funds to new investors, that worked great during uptrending markets and requiring investors to hold longer to avoid redumpsion fees (pun intended) etc.
T.M.