Executives at BlackRock Inc. seem poised to put exchange-traded funds into the defined contribution market in a way not seen before.
The question is whether they will succeed.
BlackRock's announced purchase of Barclays Global Investors earlier this month makes the combined firm the third-largest manager of defined contribution assets, behind Fidelity Investments and TIAA-CREF. The merged firm would have $213.28 billion under management, according to Pensions & Investments data.
With the deal, BlackRock gets BGI's crown jewel iShares, with ETF assets of $375 billion. The firm had captured 61% of the ETF industry's assets under management as of last Dec. 31, said Douglas Sipkin, a stock analyst at Pali Capital Inc., a financial services firm based in New York.
“I think it's a real opportunity for growth,” Susan Wagner, BlackRock's vice chairman and chief operating officer, said of ETFs.
During a conference call with analysts earlier this month, Ms. Wagner acknowledged there has been “very little penetration” into the defined contribution market by ETFs, but added that's not because “they're really not a good fit,” but rather the “constraints have been operational in nature.”
She said BGI officials had “just begun to overcome” those operational issues with some smaller plans, and are currently working with 401(k) plan providers to create platforms that can handle ETFs in their retirement plans. Last fall, BGI introduced a series of five ETF target-date funds for the 401(k) market.
Also during the conference call, BlackRock CEO Laurence Fink noted the economic downturn is making passive strategies more attractive. And, one of those types of passive strategies, Ms. Wagner noted, will be ETFs.
BlackRock and BGI officials declined further comment.
So far, ETFs have been unable to make much of a dent in the 401(k) world. For starters, record keepers have not set up their back offices to trade ETFs, which trade throughout the day like individual stocks, explained Drew Carrington, head of defined contribution and retirement solutions at UBS Global Asset Management Chicago. “Adding ETFs also goes against simplifying product lineups, which many plans are trying to do right now,” he said.
William F. Quinn, chairman of American Beacon Advisors, Fort Worth, Texas, which manages $18 billion in assets for American Airlines Inc., said BlackRock's strategy would require changing the accepted model of 401(k)s from using mutual funds to ETFs. “It will be a long, hard battle,” he said. “Most plans like mutual funds and active management. They like having things like their core growth and their core value categories that would be lost with ETFs.”
Roger Williams, managing director at investment consultant Rogerscasey Inc., Darien, Conn., agreed: “We really haven't seen much interest from clients. Most would rather have a classic index product.”
David Halseth, principal of investment consultant Strategies LLC, Denver, also doubted ETFs would penetrate the retirement plan market. “Participants won't understand the pros and cons of ETFs vs. mutual funds,” he said. “They want simple choices, and ETFs could also add fiduciary issues.”