Despite significant overall growth in exchange-traded funds, ETFs barely register in 401(k) plans.
Consultants, researchers and ETF providers say executives at plans larger than $100 million have shown little interest, primarily because the fees they pay for investment options such as institutional shares of index funds, collective trusts and separate accounts are as cheap or cheaper than those of ETFs. In larger defined contribution plans, ETFs might be included in a self-directed brokerage account, but they are rarely offered as core fund options.
“I don't see ETFs as a core investment in the foreseeable future,” said Robert Benish, executive director and interim president of the Plan Sponsor Council of America, Chicago.
“There's a long road ahead for ETFs in 401(k) plans,” said Alec Papazian, associate director at Cerulli Associates, Boston.
Several independent surveys show ETF use is still relatively rare among DC plans, and some also reflect doubts that ETFs will make immediate gains in the 401(k) universe.
- A PSCA survey published last October found no ETF use among 401(k) plans with 5,000 or more participants and little usage among plans with fewer participants. Of 15 investment approaches respondents were asked about, ETFs were used by less than 1% in 12 approaches and between 1.8% and 3.6% in the other three among plans with less than 5,000 participants.
- A January report by Callan Associates Inc., San Francisco, said its annual surveys of DC executives showed 2.3% of DC plans offered ETFs in 2012 vs. 2.5% in 2011 and zero in 2010. “All plans that use ETFs have less than $200 million in assets,” the report said.
- A Cerulli survey, published in May, found 401(k) assets accounted for only 0.2%, or $6 billion, of the $1.05 trillion in ETF assets at year-end 2011, the latest year for which Cerulli compared total and 401(k) assets. Overall ETF assets doubled between 2008 and 2011. The survey of ETF providers, accounting for more than 75% of ETF assets, showed they are more likely to target DC plans with less than $50 million in assets.
Cerulli's Mr. Papazian said “there are a lot of administrative complications” that represent “significant hurdles” for the use of ETFs in 401(k) plans. For example, he said 401(k) plans have been built to accommodate the end-of-trading-day accounting for mutual funds — not the intraday trading of ETFs. Also, mutual funds allow the purchase of fractional shares, but ETFs do not. And ETF trading fees can reduce or remove any cost advantage to participants, he said.